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 / Winter 2009 / Issue 57(originally published by Booz & Company)


An Essential Step for Corporate Strategy

Defining Operations Strategy

In fairness to Porter, he is not alone in trivializing operations. Strategists have been dismissing the function for decades. Another Harvard professor, Wickham Skinner, attempted to make business practitioners aware that the manufacturing function warranted more executive attention in a 1969 Harvard Business Review article. Titled “Manufacturing — The Missing Link in Corporate Strategy,” the article anticipated Porter’s argument by more than 25 years, noting that “a production system inevitably involves trade-offs and compromises.” But rather than focusing on strategic positioning, Skinner highlighted a number of “decision areas” where the operations arena needed to resolve important trade-offs.

Other academics built upon Skinner’s foundation as the concept of a manufacturing strategy evolved into a framework for a broader “operations strategy.” In the late 1970s, Steven Wheelwright highlighted the importance of decisions involving the “manufacturing infrastructure,” which led over time to the distinction between structural decisions such as plant location and capacity and infrastructural decisions, which involved the increasingly pervasive computer systems like manufacturing resource planning used to manage the facilities.

Ultimately, this emerging focus on the strategic decisions involving business processes found support in a competing strategy framework, the resource-based view (RBV) of a firm. Whereas Porter’s industrial organization economics school considers the choice of industry to be paramount in determining success, the RBV school focuses on capabilities as the central precept of strategy. The resource-based view of strategy dates back 50 years to a provocative book titled The Theory of the Growth of the Firm, by Edith Penrose (Wiley, 1959). This strategy school, popularized by Jay Barney in the early 1990s, applies a bottom-up perspective that focuses on the firm rather than the industry. Its proponents highlight the need to build capabilities and note that “path dependencies” can limit a firm’s options as it invests in different strategic activities over time.

Porter’s argument that a company must choose a unique set of activities to support its competitive position pays short shrift to the difficulty of building capabilities. His perspective implies that a company need only select among a menu of activity options just as a conglomerate can choose among a set of industries. Thus, the strategist thoughtfully selects the activities that will produce a competitive advantage; the operations leader merely executes. In reality, operations strategy must explicitly consider what capabilities to build and refine over time. 

Merging Porter’s positioning perspective, Skinner’s manufacturing decision areas, and Barney’s capabilities-based strategy offers a richer perspective on the appropriate definition of an operations strategy: An operations strategy should guide the structural decisions and the evolution of operational capabilities needed to achieve the desired competitive position of the company as a whole.

Structural Decisions

To be sure, the operations strategy at most companies has been determined on an ad hoc basis by the accumulated effect of many small and large operational decisions. Rarely does a company formally design and document its operations strategy in a deliberate fashion. At best, guidance on a few key operational choices might be found in an overall corporate strategy. Looking at a few cases of past decisions at leading companies, however, can highlight the importance of well-designed operations strategies.

Structural decisions define the what, when, where, and how of investing in operations bricks and mortar. The original logic of operations strategy focused on manufacturing plants, but the same issues need to be addressed for distribution plants or call centers. Four interrelated decision areas ultimately influence the size and scope of a company’s operational footprint, and they should be addressed explicitly and collectively in light of the company’s competitive positioning.

1. Vertical integration. The logical starting point is to consider, with competitive advantage in mind, which “activities” (to use Porter’s term) should be conducted in-house versus outsourced. Henry Ford’s original River Rouge complex in Detroit was the epitome of vertical integration in the days when Ford revolutionized the automobile business with the Model T and Model A. Bargeloads of raw iron ore fed the plant’s steel mills, which supplied virtually all of the individual parts for the assembly plants. Ford’s system used the new paradigm of mass production and scale economies to dominate the company’s dozens of smaller rivals.

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