Strategy in Operations Management

1. Strategic Management

In this challenge, you will learn how operations managers use long-term strategic planning, also known as strategic management, to control internal and external influences on the organization’s resources and sales. As strategic management is a large, complex, and ever-evolving endeavor, it is useful to divide it into a series of concrete steps to illustrate the process of strategic management. While many management models pertaining to strategy can be used, most general strategic frameworks include five steps embedded in two general stages: formulation and implementation.

term to know

Strategic Management

Long-term planning to consider and control the effects of external and internal forces on a company’s resources and sales.

1a. Formulation

The formulation stage establishes the organization's strategic direction. Here, operations managers conduct a thorough internal and external analysis. Internally, they assess strengths and weaknesses in areas like production efficiency, resource allocation, and technological capabilities. Externally, they evaluate opportunities and threats presented by market trends, competitor actions, and economic fluctuations. This holistic perspective informs the development of a strategic plan outlining long-term goals, resource allocation strategies, and competitive advantages to be exploited.

1b. Implementation

The implementation stage translates strategic objectives into tangible actions. Operations managers establish clear performance metrics to monitor progress and identify areas for improvement. They may implement process re-engineering to optimize resource utilization, invest in new technologies to enhance production capabilities, or develop supplier partnerships to secure resource availability. By continuously monitoring and adapting these operational levers, operations managers ensure the organization remains adaptable and responsive to the internal and external forces that ultimately influence its success.

2. Strategic Planning

To be strategic is to have plans of action that provide directions for operating in an uncertain world. Note that we say “plans,” rather than “plan.” There is no single plan or single planning approach that can deal with the complexity of contemporary markets. What is needed is a continuous process for churning out new plans, for differentiated products and services, to remain competitive. Within operations management, strategic planning establishes a long-term course of action to achieve an organization's competitive advantage in efficiency and effectiveness. This process analyzes internal strengths and weaknesses alongside external opportunities and threats. By translating the organization's mission and vision into actionable goals, strategic planning ensures operational activities align with future objectives. This focus on efficiency and effectiveness allows for optimized resource allocation, improved process design, and the development of sustainable practices to support the organization's overall strategic direction.

There are two such approaches that a business can pursue: It can strive to be efficient, or it can strive to differentiate. A firm that employs an efficiency strategy strives to be the low-cost producer and competes by charging less than the other competitors. In contrast, a firm competing on product differentiation invests more in R&D, marketing, or other features that merit a premium price tag.

Recall that there is a dynamic between high-end (or Midas) products and cheaper (Hermes) products. The features that catch on and are profitable will eventually be copied by the Hermes companies; they may or may not be lower in quality but will likely at least meet basic needs of customers or fail. The Midas company will then have to embark on further cost-cutting initiatives or improve their product to maintain differentiation. The market is relentless, and it demands a two-pronged approach of developing differentiated products and services and cutting costs.

In truth, many companies will do both, either by providing high-end to economy versions of the same products, or by continually trying to minimize costs and maintain market share across a spectrum of customers. For example, Lexus (like most car manufacturers) offers the LS Hybrid sedan at the high end but also offers the more economical IS sedan at about half the price of the LS. But for most companies, a clear identity will govern strategy, whether it is through constant innovation and differentiation, or by reducing costs. Even as car companies offer high-end and low-end models, they will likely have a general philosophy and brand image of being a luxury car or an economy car.

try it

Two of America’s most successful companies have clear indications of their governing approach to strategy in their mission statements.

• Apple’s mission statement is “bringing the best user experience to its customers through its innovative hardware, software, and services.”
• Walmart’s mission statement is to “save people money so they can live better.”

As you can see, Apple is clearly a Midas-minded company focused on innovation, and Walmart is a Hermes-minded company focused on economy. Search for the mission statements of other companies and see if they seem to weigh more towards differentiation or efficiency.

Planning can be accomplished in a variety of ways, but the model below presents one typical model of the strategic planning process. Each element is described further below.

A mantra is a thought that motivates and guides actions (sometimes it is referred to as a vision statement, although a mantra is often much shorter and used only internally). The term is taken from a religious concept used in both Hindu and Buddhist traditions. In business, it is a simple phrase that states the basis for the existence of the company. It is a slogan, a watchword, a byword, or a motto that breathes life into the firm’s existence. The mantra is not a replacement for the mission statement, although the mission statement may indicate the business strategy, as we saw in the previous section. The mantra distills the business strategy into a single word or simple phrase. A service-oriented company might have the mantra “build relationships,” while a manufacturer has the mantra of “we make it better and cheaper than anyone else.” A mantra is a single phrase that defines a business and addresses ideology and long-term goals, while a mission statement tends to be more detailed in that it defines a business, its objectives, and how they will reach the objectives. A mantra is an internal tool for reminding all employees what the company’s core value is, while a mission statement is shared with the public.

Analysis in this context is the careful evaluation of all data on inputs, transformation, and outputs to improve efficiencies. This involves both introspection, examination of internal processes like production and transportation, and extrospection, examination of external factors like market trends and the costs of materials and labor.

Goals and objectives are related terms but not interchangeable. Goals are broad statements about the company’s purpose and direction, while objectives are detailed and specific, measuring the progress towards those goals.

EXAMPLE

In taking this class, you probably have a goal of understanding how companies transform resources like materials and labor into goods and services that add value to people’s lives. That is a broad, abstract idea. You have the objective (we hope) of completing all of the class assignments with a passing grade of 70% or more. This is concrete; it states a measurable and observable outcome that indicates you have achieved your goal.

Objectives have a measurable outcome and a timeframe in which they should be reached. If the mantra is “innovate,” for example, the goal might be “deliver new products,” and one objective might be “generate 12 feasible ideas for new products and develop at least one into a prototype in the next fiscal year.”

big idea

Recall that strategy is a broad concept, describing the general purpose of a business, and tactics are the specific steps for enacting the strategy. These ideas correlate to goals and objectives. Goals and objectives are what you want to do; strategy and tactics are how you will do it.

To follow up on the previous example, if a company goal is to innovate and the objective is to develop at least one new prototype in the next year, the tactics would explain how that will be achieved, such as hiring new staff to do research and development, providing a budget and guidance to the department, or conducting focus groups with customers to generate ideas. The objectives would then put these into specific terms: how many focus groups will be conducted, or how many ideas will be generated, and the process for vetting the ideas and selecting the most feasible for further development.

terms to know

Mantra

A simple phrase that states the basis for the existence of the company.

Analysis

The careful evaluation of all data on inputs, transformation, and outputs to improve efficiencies.

Introspection

Analysis of internal processes like production and transportation.

Extrospection

Analysis of external factors like market trends and the cost of materials and labor.

Goals

Broad statements about the company’s purpose and direction.

Objectives

Detailed and specific statements measuring the progress towards those goals.

3. Who Is in Charge of Strategic Planning?

We have taken a broad view of strategic planning, but who does this planning? Particularly, the top-level goals that will guide a business over the next few years? The traditional model for organizational decision making is a CEO or president calling the shots from their desk, or perhaps a CEO and a few close consultants. However, this model is no longer the norm. Boards are being urged to play a more active role in strategy formulation. For example, as regulatory and other pressures increased, many boards have sought to become more deeply involved.

Some argue that boards should play a meaningful role in the formulation phase of strategic development, particularly strategy formation, and further, that the board should be composed of many stakeholders across a spectrum of the organization’s influence. The pros and cons of such a collaborative strategy formation are shown below.

However involved the board is, a “code of best practice” should be written to clearly define the responsibilities of the board with respect to strategy development, such as:

• Setting the ultimate direction for the corporation.
• Reviewing, understanding, assessing, and approving specific strategic directions and initiatives.
• Assessing and understanding the issues, forces, and risks that define and drive the company’s long-term performance.