Operations strategy is a critical component of overall corporate strategy, moving beyond a purely tactical role to become a significant source of competitive advantage, as demonstrated by successful companies like IKEA and HelloFresh.
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Hi there!
In this lecture, you will get a brief introduction to operations strategy.
Let's start with a usual misconception.
Some senior managers think that operations has nothing to do with strategy,
instead, it only represents the acting part of the organization,
concerned with the operational and tactical levels.
Companies with such managers are usually not excellent.
Operations can indeed be very strategic,
and many of the most known companies are well aware of this.
Let's consider an example: IKEA.
IKEA offers 25 000 different furniture and household products in 400 stores, in 50 countries.
It has become the world's largest furniture retail chain.
How? Their success, in fact,
is to a large extent due to IKEA's operations and supply chain strategies.
With the customer in mind, they start with setting the price
and then design a quality furniture that is easy to manufacture, ship, and assemble.
Most of these are stored in flat packs, with minimum space waste.
They are easy to handle, store, and transport.
IKEA is also very strategic about its make-or-buy decisions. Around 35% of IKEA's sales are wooden furniture,
and one-third of this is produced in IKEA's own factories.
IKEA set up its own manufacturing branch to reduce the risk of supply disruption
and to keep production know-how in-house. This branch named IKEA Industry,
is the largest furniture manufacturer in the world, with 20 000 employees, in more than 40 factories.
And not to forget, the idea of having the customer assemble the product themselves
saves cost in manufacturing and transportation.
In IKEA warehouses you get your furniture on the day of purchase,
while many other furniture retail chains have long lead times.
The days, when IKEA furniture were missing parts or assembly instructions were intricate, are far gone.
That's why consumers continue to appreciate IKEA.
Here's another example of excellence in operations strategy.
HelloFresh is a Berlin-based company that has grown from nothing in 2011
to the global leader in the market kit industry. They serve more than 5 million meals per week.
While they have one thing in common with IKEA, that customers assemble their products at home,
their operations strategies are quite different. HelloFresh's strategy is based on the use of data.
Customer order food kits, which are delivered to their door on a subscription-based model.
Data from orders are carefully analyzed to pick up trends and consumer preferences.
In 2019, HelloFresh delivered more than 260 million meals,
so they have quite some data to make use of.
The subscription-based model allows HelloFresh to make their own, robust forecasting algorithms,
and help them optimize the product selection offerings.
Also, the logistics operations are key.
With more than 40 million picks per week in their warehouses,
you can imagine HelloFresh puts a lot of emphasis on operational excellence practices in their warehouses.
If you think they do so by holding stock, you're wrong.
HelloFresh operates on a just-in-time basis, where all fresh stock is only in transit to a consumer.
This minimizes food waste and logistics cost in their own operations,
but also with the customers. Impressive!
But not every company can be IKEA, HelloFresh, Amazon, Toyota, or Zara
- companies that are all known for their operational excellence.
Many companies, in fact, compete despite their operational capabilities.
Hayes and Wheelwright separated four stages of how operations can contribute to corporate strategy.
In Stage 1, the company is doing a lot of firefighting and only corrects the worst problems.
I think we may all have experienced companies that operate this way,
during holidays or everyday shopping.
In Stage 2, companies simply adopt best practices from others. This is a good strategy to become less bad.
In these firms, the operations function is usually seen as the implementation arm of the company.
In Stage 3, the company strategically links operations with strategy.
It has become effective and efficient in the areas where it wants to compete.
And in Stage 4, the operational capabilities has become a competitive advantage.
If you heard about the resource-based view of strategy, this view applies mostly to firms in this category.
In these firms, Operations is in the driving seat, when strategy is developed.
But should companies consciously and carefully develop an operation strategy?
According to Wickham Skinner, the father of manufacturing strategy, the answer is: yes.
Successful companies care about operations. One way to understand operations strategy is
to separate Structural decision areas from Infrastructural decision areas.
The Structural decision areas traditionally include:
Facilities, Capacity, Process technology, and Supply network.
But today, we also have to add Information technology, as a separate area.
The Infrastructural decision areas include Planning and control,
Quality, Work organization, Human resources, New product development, and Performance measurement.
Now that we know what an operations strategy is, we need to know how to create one.
One way to go about it is to start by defining your competitive priorities,
based on market opportunities.
Then design the structural and infrastructural decision areas,
and finally, build the competitive capabilities, aligned with the competitive priorities.
So, that's it! Now you know something about Operations strategy,
what it is, and how to develop it. See you!
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