BOS_Operation_Planning
VALUE STRATEGY AND OPERATIONS: PLANNING AND CONTROL
1.Introduction
Planning and control should be an integrated activity, not two separate activities, which often at the end of the day prove to be unrelated. Walters and Halliday (1997) suggest a planning and control system, which is to be useful for both marketing and financial management, should consider the task(s) of the organisation, its technology and its structure.
Walters (2002) points out that …focussing on efficiency alone does not build long-term value for customers, nor does it create or extend competitive advantage. Customer-focussed companies create additional value for their customers by building value chains to service customer needs. They create a multi-enterprise organisation that integrates supply chain efficiencies with a demand chain strategy. Strategic operations are an approach that identifies the activities of all organisations in the value chain. It seeks to identify where and who can perform activities to greatest effect to create competitive advantage.
W alters (2002) suggests operations can be defined as …production, logistics and service?. Operations are the day to day activities performed by the company. In most western organisations, operations management often preoccupies management, often at the expense of strategic planning.
2.Value Strategy
Minzberg and Quinn (cited in Buttery and Richter-Buttery, 1998) adopted the opinion that most definitions of strategy incorrectly assume that a company?s strategy is the result of rational planning. They offer five definitions,
“The Five Ps for Strategy: plan, ploy, pattern, position and perspective.
Strategy is a plan or a guideline to deal with a situation. Implicit in this definition is that strategy is developed purposefully, and in advance of any situation.
Strategy is a Ploy or a specific manoeuvre intended to outwit the competitor.
Strategy is a Position or a means of locating on organisation in an …environment?.
Strategy then becomes the mediating force or match between the firm and its
environment.
Strat egy is a Perspective or a concept, or a …Weltanschauung? (a way to view the world), or a culture or a driving force. Strategy is to the organisation what
personality is to the individual.”
(Buttery et al, 1998)
Day (1999) stresses that an effective strategy must be straightforward in both intent and direction. “Too much subtlety and complexity, and the essential ingredients won?t be consistently understood or acted upon by the organisation. This is damaging to performance in the market because it sends erratic and confusing signals to customers.” Day goes on to define strategies as a combination of highly interdependent choices or …directional statements?:
“The direction is set by four choices:
Arena: the markets to serve and customer segments to target.
Advantage: the positioning theme that differentiates the business from competitors. Access: the communication and distribution channels used to reach the market.
Activities: the appropriate scale and scope of activities to be performed”.
(Day 1999, p6) Da y?s final set of choices involves adapting the strategy both to impending threats and emerging opportunities.
Kotler (2000) suggests that while goals are what every business unit wants to achieve, strategy is the game plan for getting there, and each business must tailor a strategy to achieve its goals. Walters et al (1997) demonstrates that Implementing marketing strategies considers how resources may be allocated to meet the marketing objectives, which result from a review of the opportunities offered by the environment in which
the firm operates. Walters et al (1997) suggests strategic decisions are concerned with the long term issues of identifying and responding to market opportunities, involving analysing competitive issues, resource allocation, and then identifying a strategic direction around a competitive advantage focus. Operational marketing manages the product offer by implementing the strategies.
3. Operations
According to Kotler (2000) the term operations is used for industries that create and provide services, in the same context that the term manufacturing is used to describe industries making physical products. In a restaurant for example, the operations team includes the waiters and waitresses, doormen, somelier etc. With marketing promising various service levels, Kotler explains the importance of these two departments working well together.
Walters et al (1997) suggests that the role of operational marketing is to deliver a relevant product offer to targeted customers in such a way that it creates more value for the customer than any offer from its competitors, …strategic marketing and operational marketing are thus linked and reinforced by effective marketing information and intelligence activity?.
Source: Walters (2002)
Walters (2002) continues suggesting that …Operations strategy has five key features:
Consumption Chain profile
Buying organisation
Barriers Value Use
Risk Significance of Expenditure Level of use Proportional
“Lifestyle” characteristics Activities “Loyalty”
Customer (Benefits
Customer Value Model (value drivers)
Customer Acquisition Costs
(Lifecycle Costs)
Value Proposition
a visionary who sees how …putting pieces together? can create a more effective
business model;
core processes that are inter-organisational rather than intra-organisational;
a supporting infrastructure that facilitates integration;
the customer as an integral part of the chain, a major stakeholder;
An inter-organisational performance planning system.
The result is an overall approach with five distinctive characteristics:
distributed assets (such as manufacturing and distribution facilities as well as inventories) located so as to achieve strategic effectiveness and operating
efficiencies;
distributed processes (the design, production, marketing and service maintenance processes) located so as to achieve flexibility, quality, time and cost objectives by specialist participants in the value chain;
flexible systems providing flexibility in product-service delivery;
communication, co-operation and co-ordination between processes;
synchronised networks of virtual entities –the virtual organisation.?
4. Business Models
Walters (2002) illustrates the business enterprise model.
Enterprise = f
Value
Tangible Assets
Intangible Assets
Efficient Use Of Existing Asset Infrastructure Capacity expansion of products which retain leadership characteristics: - Product/ market
penetration - Product/ market
extension
- Product/ market
development Shared assets with specialist partners
Reinforce
distinctive capabilities
Brands, image and reputation
Reinforce impact of brand influence - Product/ market extension
-
Product/ market development
Focus R & D
- Product technology -
Process technology Invest in
management and workforce expertise
Use relationship management to create and extend partnership linkages that develop reproducible capabilities that: - Expand market reach and influence - Strengthen
customer loyalty linkages
- Strengthen supplier loyalty linkages
Increase capacity
utilisation
Value analysis: - Processes - Products Process
development - Modularisation - Inventory
management - Lead time
management - Flexibility Manufacturing/ distributing for external organisations
(Source: Walters et al 1997)
Growth
Management Options Through Investment
Latent Value
Premium Value
Tangible
Value
+
+
The Enterprise Value Model provides managers with an opportunity to link strategic and operational areas of the company by dealing with areas of the business that can be linked to each area. Tangible value reflects the company?s ability to operate
efficiently. Intangible assets reflect the company?s ability to ope rate effectively, while building long term/ strategic capabilities such as the brand, R & D etc. Latent Value refers to the company?s future value. Thus, strategic and operational areas of the company are accounted for by the Business Enterprise Model. The Du Pont Model
As cited in Walters et al (1997), the Du Pont Company developed an approach to planning and control which was designed to monitor divisional performance. Its system of financial analysis brings together the activity ratios, which measure how effectively a firm or its strategic business units (SBU?s) employ the resources they control, with the profit margin on sales. It also shows how these ratios interact and determine the assets profitability.
The (DuPont) Strategic profit model
x = =
Source: Walters et al 1997
The strategic profit model lets us relate management activity components
quantitatively, and as Walters et al (1997) explain, helps with managerial decisions in four ways;
Margin management Profit Net assets
Net assets Profit Equity Return to Shareholders
net assets
Gearing investment and financial management
ROE Return on Equity
Asset management
1.Identifies the principal objective of the business ie. To maximise shareholder
return.
2.Identifies the growth and profit paths available to a business (improve margins
earned, increase asset productivity, increase gearing).
3.Highlights principal areas of decision making ie. Asset management, margin
management and financial management.
4.Provides a useful model for appraising the marketing and financial aspects of
strategy options.
Economic Value Added
Economic value added is a performance measure that was initially proposed by Stern Stewart and Co. Stern Stewart and Co maintained that economic value was equivalent to the operating profit minus taxes minus (capital employed multiplied by the cost of capital).
Walters et al (1997) explains: Capital is a comprehensive calculation, which includes fixed assets, working capital, and can included intangibles such as capitalised expenses to maintain brands, R & D and management development expenditure if they are deemed to be of significance. Financial performance is indicated by the value of EVA components. A positive value indicates that wealth or value is being created for the shareholder, while negative values indicate that value has been destroyed. Essentially, this model subtracts the cost of capital from the after tax operating profit for the period, and is oriented toward the current period or recent past.
Value return on investment
Rappaport (as cited in Walters et al 1997) developed a performance indicator based upon the discounted cash flow (DCF) means of calculating …value?. This method gives the advantage of breaking the companies activities into a series of projects, for which revenues and costs can be separated. It is thus particularly useful for evaluating strategic alternatives.
Rappaport?s theory was that the VROI was created by dividing the post-strategy value minus the pre-strategy value by the present value of the projected investments.
Rappaport?s ap proach is thus a measure of the value created per discounted dollar of investment. It provides a means by which to identify which alternative offers the largest benefit. VROI must be greater than zero if shareholder value is to be created.
Net present value analysis
One of the most commonly used discounted cash flow (DCF) methods is the net present value method (NPV). From the argument that a dollar received today is worth more than a dollar to be received in ten years from now (because the dollar received immediately can be invested and earn a return) we can say that an amount to be received in the future has a present value, which can be found by discounting future income values.
Future amount .
Present value = Interest rate x time in years
Or:
F .
PV = (1 + r)t
Where:
PV = present value
F = future amount
r = interest rate / discount rate
t = time period over which value is to be calculated
Deducting the initial investment from the present value arrives at the net present value (NPV):
n
NPV = ∑ Ft . - I
T = 1 (1 + r) t
Where:
NPV = net present value
∑ = the summation over years
t
t = 1, 2…n
Ft= the forecast net cash flow arising at the end of year t. This represents
the difference between operational cash receipts and expenditures
(including capital replenishment during the life of the project)
r = required rate of return on the discount rate
n = project life in years
I = the initial cost of the investment
5. Management Models
Value Positioning in an Organisational Context
Source: Walters (2002)
l y s i s o f V a l u e D r i v e r s
a n d C o o r d i n a t i o n K n o w l M a n a g V a l u e P C o m p e t i t i v e A d v a n t a g e S t r a t e g i e s C o r e c o m p e t e n c i e s / p r o c e s s e s / a s s e t s K e y S u c c e s s F a c t o r s
V a l u e P r o p o s i t i o n (P r o d u c t -S e r v i c e A t t r i b u t e P a r t n e r O b j e c t i v C u s t o m e r V a l u e C r i t e r i a
C u s t o m e r V a l u e M o d e l (V a l u e
D r i v e r s )
C u s t o m e r A c q u i s i t i o n C o s t s
The above diagram summarises the activities of the value chain.
Relationship management
Relationship management is the managerial activity which identifies, establishes, maintains and reinforces economic relationships with customers, suppliers and other partners with complementary (and supplementary) capabilities and capacities so that the objectives of the organisation and those of all other partners may be met by agreeing and implementing mutually acceptable strategies.
Relationship management can influence positioning and strategy by identifying, developing and maintaining partnerships that achieve the product service objectives needed to meet customer expectations. Relationship management moves the organisation towards cross-functional decision making and control and is clearly an important component in strategic operations management.
Relationship management provides input into how and who produces value through network trust and the support infrastructure
Technology management
Another underlying influence in strategic operations management is technology management. It can be defined as; the integration process and product technology to address the planning, development and implementation of technological capabilities and capacities to meet the strategic and operational objectives of an organisation or combination of organisations.
Technology management can enhance the value delivered by planning manufacturing responses that deliver market volume and product and service delivery characteristics. It develops an asset structure that meets cost and plant utilisation goals and customer value specifications. A technology strategy may be derived by deciding upon the combined manufacturing and logistics support needed to meet market demand. Technology management involves understanding the economies of specialisation and integration. Companies can decide upon how and when value should be produced.
Knowledge management
Knowledge and knowledge management are integral components in strategic operations management. Knowledge management can be defined as the organisational capability which identifies, locates (creates or acquires), transfers, converts and distributes knowledge into competitive advantage. For example, knowledge
management influences R&D, investment strategy and the application of experience-based knowledge to emphasise commercial abilities. Knowledge is a resource, in the same context as financial, human and other resources. Knowledge management within strategic operations management enables an organisation to make more effective decisions about how to structure value chain operations to maximise customer satisfaction. In a broader context, we use the knowledge base within an organisation to identify what additional knowledge is required to increase competitive advantage; to develop a knowledge strategy.
Knowledge management provides a perspective to both supply and customer markets that can be used to …locate? the value chain for maximum strategic effectiveness. The efficient transfer of information among suppliers and customers enhances competitive advantage, by being close to both supply and demand markets, while facilitating their customers? management of the demand chain. It results in an educated decision concerning what value is required, where the value should be positioned and who the principal partners in the value chain are to be.
6.Planning and Control
Planning and control are complementary activities. Walters et al (1997) argue that planning concerns the quantitative and qualitative objectives of the organisation, while control processes ensure that the activities and resources committed by the organisation, to achieving its? objectives are used efficiently.
The primary purpose of any business is to increase shareholder value, and thus the objective of a planning and control activity may be similarly defined.
Walters et al (1997) explains that the growth of the company?s profitability, productivity, and cash flow, resulting from its ability to deliver …value added? benefits to its customers, better than its competitors, will generate a response from the market place sufficient to generate the growth required by the shareholder. In turn this process should trigger a positive response from the investment market, reinforcing the value delivered to the shareholder.
The structure of the organisation is of particular importance, when considering how the planning and control process may best be integrated. As cited in Walters et al (1997), Wilson et al suggest:
… If a company is organised in such a way that lines of authority are clearly def ined with the result that each manager knows exactly what his or her responsibilities are and precisely what is expected… then it is possible to plan and control costs, revenues profits etc. in order that the performance of each individual may be evaluated and, one hopes, improved….?
Thus if this structure is in place, the overall performance of the organisations strategic and operational activities may be better planned, implemented and controlled. Wilson et al used the concept of responsibility accounting to develop an approach to control. This involves designing the control system so that is matches the organisational control structure and reflects the responsibilities of management functions. Organisational charts could then be developed which detail responsibilities.
Walters et al (1997) uses this argument to construct an organisational chart for strategy implementation, its two major benefits are;
1.it leads to clearly defined responsibilities and limitations
2.it encourages a focus on the financial aspects of the activities with regards to
quantity, quality and cost of achieving output.
7.Summary
Business strategy and operations have previously been considered as two separate and unrelated areas. However, more holistic methods of management are now beginning to become more prevalent as managers realise that strategy is an important area of the business and is most effective when integrated with operations. Models such as the Enterprise Value model, EVA, VROI, NPV and the DuPont model all offer managers easy-to-understand frameworks with which to integrate operations and strategy, ultimately improving shareholder value.
8.Discussion Questions
1.Outline three reasons why managers should attempt to integrate strategic and
operational decisions. In your opinion, why has this been such a difficult task for most managers?
2.How can strategic and operational decisions be integrated to maximise
shareholder value?
3.Outline three business models that attempt to integrate strategic and operational
decisions. For each model, provide a critique as to whether each model achieves this end.
9.Reference / Reading List
Kotler, P., 2000, “Marketing Management –The Millennium Edition”, 10th Edition, Prentice Hall.
Walters, D., 2002, “Operations Strategy”, Palgrave Macmillan
Walters D. and Halliday M., 1997, “Marketing and Finance – Working the Interface”, Allen and Unwin.
Buttery, E. A. and Richter-Buttery, E. M., 1998, “Strategic Planning For Uncertainty - Planning, implementing and controlling the firm in times of change”, InFocus Publishing.
Day, G. S., 1990, “Market Driven Strategy –Processes for creating value”, The Free Press.
Beech J., (1998) “ The Supply-Demand Nexus” in Garrorna editor, Strategic Supply Chain Alignment.
Dommermuth W. P., and R. C. Andersen (1969), “Distributi on Systems: Firms, Functions and Efficiencies” MSU Business Topics, Vol. 17, No. 2 (Spring).
Kalmbach Jr, C., and C. Roussel, (1999) “Dispelling the Myths of Alliances”, Outlook.