Operations management’s main aim is to identify a common set of objectives such that the organisation can deploy its resources and capabilities to produce goods and services for internal and external customers. Operational management not only supports operational efficiency, but it also provides a potential source of strategic competitive advantage and it explains how operations strategy influences the activities of operations managers.
Porter’s three generic strategies broadly define a process through which these common set of objectives can be found. However, these strategies are mutually exclusive as Porter emphasises the need to only adopt one strategy and failure to do so will result in a “stuck in the middle” (Porter , 1980) scenario. He discusses the idea that practising more than one strategy will lose the entire focus of the organisation hence a clear direction for a future path cannot be established.
Operations Strategy The changing business environment over the last century has prompted operations management to change the pattern of decisions and actions that were intended to achieve its long-term goals. Increased cost-based competition, demands for better service, choice and variety, increased ethical awareness and more legal regulations (Slack et al., 2004, p.8) have led to the globalisation of operations networking, technologies replacing manual jobs, computer-based integration of operations activities, mass customisation, fast time-to-market methods and lean process design. From the volume of output, variety of output, variation in demand for output and the degree of visibility of production that customers have, four trade-offs and two linkages have become apparent. The evolution of these trade-offs and linkages are a major part of the progression of world class manufacturing from the Industrial Revolution to where it stands today.
Though Hayes and Wheelwright had coined the term world class, Womack et al. (1990) more accurately described the status of becoming world class as the ability cut the usage of all factor inputs and still maintain a high level of output. With the development of world class manufacturing two views of operations strategy emerged. One which highlighted the planned corporate strategy and unitary managerial power concepts as decisions were made from the top levels of management and were enforced on all the employees, and the other, which saw corporate strategy transpire from empowering individuals and drawing ideas from day-to-day operational experiences. As the perception of manufacturing changed due to the introduction of new processes such as the lean design model and new innovative technologies that helped supply chains, the four trade-offs became more distinct.
Prior to Henry Ford’s introduction of the automated assembly line, American manufacturers had already extended the basic economic principles of Adam Smith and used jigs to make standardised products, from which the notion of using interchangeable parts to facilitate assembling complex products arose. This led to a substitution from non-skilled labour basic-skilled labour capable of operating the new contraptions. The second trade-off between volume and variety came to light after firms were able increase output and cut long run average costs by investing in capital and firing workers. However, firms had to make an executive decision at this point as to whether they were going to stick to producing low volume, high variety products or use the emergent manufacturing techniques to produce low variety products en masse.
The third trade-off between quality and cost has a similar optimisation problem to the setup and inventory costs. The optimal quality level of output is when total costs are minimised and the cost of failures is relatively low. Japanese car company Toyota is a prime example of the last trade-off between setup costs and inventory costs. Using the kanban card controlling system, parts of the manufacturing process are only allowed to produce goods when they have received notification on the kanbans stating that orders have been placed. Even though this method significantly reduces inventory costs, it would only be successful if the manufacturing processes were quick enough to deal with demand responses and able to assemble goods to sell within a short time after the kanban had been written.
The just-in-time method of manufacturing employed by Toyota is that of the bottom-up operations strategy defined earlier. The demand for the product is pulled through the system rather than basing product stock on estimated sales projections that have been calculated on previous sales and trends. It is an approach which differs from traditional operations practices insomuch as is stresses waste elimination and fast throughput, both of which contribute to low inventories. A comparison of the just-in-time and materials requirement planning system will show the influence of Porter’s generic strategies on operations strategy in general.
Porter’s generic strategies In the economic analysis of the theory of the firm, the key feature of a monopoly is that it faces an imperfectly elastic, downward sloping demand curve whereas in perfect competition, the elasticity of demand was infinite. A good way to escape an infinite elasticity problem is to differentiate a product such that there aren’t any close substitutes. Hayes and Pisano (1994) mirrored this by stating that “long term success requires that a company continually seeks new ways to differentiate itself from competitors” by finding sources of competitive advantage and focusing on core competencies that were unique to the firm.
Product differentiation is the first of Porter’s three generic strategies and it fulfils a distinctive customer need by specifically tailoring the service or product to consumer to demand, thus allowing organisations to charge a premium price to capture market share. Hoover Limited effectively implemented this strategy by providing a product of superior value to the customer through product quality, features and branding. They were able to charge a higher price as the quality was perceived on a brand name and image, to the extent that Hoover became a “household name…known worldwide as a maker of quality appliances…” (About Hoover) and consumers now use the word Hoover and vacuum cleaner interchangeably.
With product differentiation, firms choose quality and variety, whereas Porter’s alternative strategy of cost leadership focuses on low cost and volume. By producing high volumes of standardised products the firm emphasises efficiency, benefits from economies of scale and learning from the experience curve effects. In terms of mass manufacturing using the materials requirements planning strategy, cost leadership was a definitive means of keeping a considerable market share advantage over the other incumbents in the industry.
Low-cost airlines are a prime example of providing a service solely based on giving consumer’s the lowest fares to travel from one location to another. Cost leadership became a means of product differentiation as firms such as Ryanair and EasyJet’s main selling point was the fact that they provide low quality, low service, and budget air travel for a fraction of the price. When just-in-time technique was established, cost leadership was still a harbinger for corporate strategy in the manufacturing industry as Toyota were adamant to reduce inventory costs because they did not have the capital to store cars and compete with General Motors and Ford.
This method is very popular in other industries such as retail, where the sudden growth of Primark is due to the fact that it can supply high-street clothing on demand in a limited time period. Product differentiation and cost leadership remained in the broad manufacturing market scope as two of the best strategies to follow when making decisions about operational strategy. The resource based view and use of core competencies that were valuable, rare, inimitable and non-substitutable suggests that operations strategy evolved from the ideas that firms either concentrated on cost or quality.
Research on profits accrued due to the implementation of various market strategies showed that firms with higher market shares were as profitable as those with low market share. Porterian analysis indicates that firms that pursued a cost leadership strategy as an initial strategy for operations strategy were successful as they captured large market shares due to their low priced products. Firms with low market share were successful as they used market segmentation to focus on a small but profitable market niche. Those stuck in the middle however were less profitable as they did not have an initial viable generic strategy to guide the operations management of the firm to implement specific operations strategies.
Bibliography and references
About Hoover, The Hoover Generation Future, http://www.hoover.co.uk/about-us/
Hayes, R.H. and Pisano, G.P. (Jan-Feb 1994) ‘Beyond world-class: the new manufacturing strategy’, Harvard Business Review, 72 (1)
Porter, M. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press