A compilation of my notes on Operations Strategy
January 31st, 2022
The world we live in was well predicted by 20th century forecasters, “Reduced barriers to trade are allowing smoother flow of goods, services, capital and labor across geographic boundaries, and thus more efficient allocation of resources globally.” Sara L. Beckman and Donald B. Rosenfield. Operations strategy addresses questions of how a company should structure itself to compete in the complex web-based economy, taking apart major capital decisions and technology adoption to the development of a strong supply base to deliver sophisticated products and services, while remaining competitive in the most developing economies of the world.
Operations includes both manufacturing and service operations, ranging from small to large volume production to continuous flow operations, such as commodity industries. Service operations in the 21st century include healthcare and office work, but also constitute the majority of online retail companies including Amazon and Etsy. The latest economic blunder has facilitated a new placement of operations activities to produce the same amount of required resources with less service.
Global Development Operations Strategy
In a developed economy, such as the United States, economies tend to focus more on allocating resources to service operations. In contrast, developing economies are fixed to agriculture and manufacturing, until segments of the economy increase the standard of living, raising labor costs with it. This beat to the same drum transition has been seen time and time again in global economics. For example, in the “four tigers”–South Korea, Taiwan, Singapore, and Hong Kong, labor remained focused on commodity markets, where the basis of competition is largely built on cost rather than quality. Following an influx of production, labor costs increased significantly–enough so that nations shifted priority to quality goods and innovation.
When manufacturing and service operations in advanced economies are uncompetitive, exchange rate adjustments cause costs to come down and the standard of living is reduced. For less developed societies, investment in manufacturing and service operations provides a mechanism for creating jobs and raising the standard of living.
Should advanced economies outsource their operations to lower cost locations and focus their efforts on gaining a competitive advantage?
February 8th, Vertical Integration
Vertical Integration decisions are one of the most fundamental decisions a company can make, and should be addressed regularly. To address vertical integration, the topic boils down to questions like:
- How much of the value chain should we own?
- What activities should we perform in house?
- For the activities we perform in house, do we have sufficient capacity to meet internal demand?
- What conditions should we change the amount of the value chain we own?
- Should we direct changes towards the suppliers or towards the customers?
Strategic Factors, Market Factors, PST Factors, and Economic Factors all weigh into Vertical Integration Decisions:
Strategic Factors include whether or not an activity is critical to developing or sustain the core capabilities of a firm.
Market Factors focus on the dynamics of the industry in which the firm resides.
PST Factors (or Product, Service, and Technology) relates to the technology, product and service architecture and product or service development.
Economic Factors balance the costs of owning an activity with the costs of transacting for it instead.
Question: Select a company, explain what vertical integration decisions they have made.