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Hospitality Business Development. Operations Strategy

“Operations strategy is the total pattern of decisions which shape the long term capabilities of any type of operation and their contribution to overall strategy, through the reconciliation of market requirements with operations resources”

A strategy is a broad, long-term plan aimed at achieving business goals and developed at three levels: corporate, business, and functional levels. Operations strategy can be defined as “a blueprint that sets the vision and overall direction for operations decision-making” (Zhao and Lee, 2008, 1). In simpler words, operations strategy is a high-level plan for a business that has the following components: finance, product development, marketing, and operations, taking into consideration customers, competitors, and its resources. It supports the business strategy of a firm along with other functional strategies such as marketing and finance strategies.

Operating strategy refers to the efficient alignment of product processes and resources (including people) with the needs of identified market segments. Globalization, rising customer expectations, and advancement in information technology have changed the business environment of today and to be competitive in this changing environments, organizations must improve in their operational capabilities such as quality, flexibility, speed, services, and costs. This is done through operations management. Thesis: Operations strategy is the total pattern of decisions which shape the long term capabilities of any type of operation and their contribution to overall strategy, through the reconciliation of market requirements with operations resources

Operations

All organizations make products. They may be tangible good such as computers and books or intangible services such as insurance, education and transport. Most products are a combination of both goods and services as in the case of the hospitality industry (Lowson, 2002, 5). At McDonalds, the product is a package of goods – the food – and fast service. The core organizational activities that make these products are termed as “operations”. Operations at IBM make computers and operations at British Airways fly passengers. Operations management includes planning and anyone who is directly responsible for making a product will be called an operations manager (Waters, 1999, 1).

Operations Management

Slack (1983, 4) defines operations management as ‘the set of tasks which manages the arrangement of resources in an organization which is devoted to the production of goods and services’ (Vernon, 2002, 147). Initially, operations management dealt with techniques for problem solving in manufacturing and traditional operations management techniques included high-level price/cost analysis, quality control and factors such as flexibility. However, in recent years, Operations management has widened its scope because organizations today operate within networks of supply and demand that extend beyond conventional boundaries (Vernon, 2002, 147).

Operations Management is concerned with designing the system of operation, planning and controlling activities, designing the jobs of operation’s staff and ensuring quality standards. With the widening scope of operations management there is also a view operations management can be studied separately as supply-chain management or resource-based management. This move demands a closer examination of constituent parts than the traditional techniques of Operations Management (Vernon, 2002, 148). There is increased awareness of the significance of Operations Management due to increase in customer knowledge, a strong need to reduce costs while improving efficiency and need for improved service to maintain competitive advantage and a heavy, need to reduce costs whilst improving efficiency.

Operations Strategy

Strategic decisions are long term decisions and when they are directly concerned with the operations, they form the operations strategy. An operations strategy includes all strategic decisions made by operations manager. The focus is on how the competitive environment is changing, what the operation has to do to meet current and future challenges and long term development of resources and processes to provide sustainable advantage.

Operations Strategy has been defined as “the total pattern of decisions which shape the long-term capabilities of an operation and their contribution to overall business strategy” (Slack and Lewis, 2002). Operations strategy is mainly concerned with resources, competencies and organizational capabilities and the competitive environment in which the firm is “embedded”. There are two main views of operations strategy: market-driven view and the resources-based view.

In the market driven view, the focus is on the demands of the markets, and exploitation of market opportunities. The resources-based view focuses on the individual resources of the organization and using them to create competitive advantage. The main areas in which decisions have to be taken in order to devise an operations strategy are: planning the overall capacity of the operation, managing supply networks, managing the process technology which produces goods and serves and overall development and improvement of the operation.

Differences Operations Management versus Operations Strategy

While operations management refers to the whole range of decisions taken in the realm of operations, operations strategy refers to long term decisions taken directly in the context of operations. Operations strategy is concerned less with individual processes and more with the total transformation process that is the whole business.

Operations-Management Operations Strategy

Time Scale Short term Long term
Level of Analysis Micro Macro
Level of Aggregation Detailed Aggregated
Level of Abstraction Concrete Philosophical

Operational performance

Throughout the early part of the 1980s there was considerable discussion over the economic miracle of Japan. Management experts such as Schonberger (1986) and Hall (1983) argued that the operations in Japanese firms were simply better managed. There was widespread recognition that the operations function can have a significant impact on product quality (Deming, 1986; Crosby, 1972) and increased awareness regarding operational performance.

During the same period, Skinner’s work on manufacturing strategy became popular in US and UK (Neely, 2002, 45). One of Skinner’s core arguments was that operations managers had to focus and decide whether to compete on the basis of quality or time or cost or flexibility (Neely, 2002, 45). This lead to a stream of literature associated with the factors of operational performance: quality, time, cost, and flexibility (Garvin, 1987, 101).

Early in the twentieth century, DuPont used a pyramid of financial ratios, which linked a wide range of financial ratios to return on investment (Neely, 2002, 146). Fitzgerald et al. (1991) proposed a framework classifying measures into two basic types – those that relate to results (competitiveness, financial performance) and those on the determinants of those results (quality, flexibility, resource utilization, and innovation).

This shows that results obtained are a function of past business performance in relation to specific determinants. Keegan, Eiler, and Jones (1989:45) proposed a performance measurement matrix reflecting the need for balanced measurement. It categorizes measures as being “cost” or “non cost,” and “external” or “internal,” reflecting the need for greater balance of measures across these dimensions. This is a simple framework which has been found to be able to accommodate any measure of performance (Neely et al., 1995, 80). This allows an organization to plot its measures and identify where there is a need to adjust measurement focus (Neely, 2002, 147).

Brown’s 1996 Macro Process Model of the Organization links five stages in a business process and the measures of their performance. These stages are defined as inputs, processing system, outputs, outcomes, and goals respectively. The model demonstrates how inputs to the organization affect the performance of processing systems and ultimately the top-level objectives of the organization. Brown argues that each stage is the driver of the performance of the next.

The most popular of the performance measurement frameworks has been the balanced scorecard proposed by Kaplan and Norton (1992 and 1996a). The balanced scorecard identifies and integrates four different ways of looking at performance (financial, customer, internal business, and innovation and learning perspectives).

The authors identify the need to ensure that financial performance, the drivers of it (customer and internal operational performance), and the drivers of on-going improvement and future performance, are given equal weighting. The balanced scorecard reflects many of the attributes of other measurement frameworks but more explicitly links measurement to the organization’s strategy. The authors claim that it should be possible to deduce an organization’s strategy by reviewing the measures on its balanced scorecard.

More recently, the European Foundation for Quality Management’s (EFQM) Business Excellence Model and its US equivalent the Malcolm Baldrige Quality Award take a broader view of performance, addressing many of the areas of performance not considered by the balanced scorecard.

Strategic perspective to operations performance objectives: Operation Performance objectives are very broad. The five operational performance objectives are quality, speed, dependability, flexibility, and cost (Slack et al, 2004, 50). Operations management has an impact on the five broad categories of stakeholders in any organization: customers, suppliers, shareholders, employees and managers. The five operations performance objectives apply to all these five groups of people, primarily to the customers.

Operations responsibilities to employees go beyond making them more employable in the future. It includes the general working conditions which are determined by the way the operation has been designed. Society is also impacted by operations performance objectives through the environmental responsibility exhibited by operations managers.

  • Quality is believed to be the most important operational performance objective. Quality as a performance objective serves two purposes: on the external side, good quality products lead to greater customer satisfaction leading to greater sales and more revenue for the company; on the internal side, adherence to the manufacture of quality products or services means there are very little mistakes made in the operations processes and activities leading to savings in cost, increase in dependability and speed.
  • Speed refers to the time taken to respond to a customer’s demand. Externally, faster time of response always satisfies the customer leading to more business or more revenue. For example, the postal service in most countries and most transportation and delivery services charge more for faster delivery. Internally, speed reduces cost by reducing inventories and risks and also increases dependability.
  • Dependability refers to the customers receiving their products or services on time. Externally, dependability is desired by customers and hence it increases business. Internally dependability affects cost by saving time, by saving time directly, and by giving the organization stability to improve its efficiencies.
  • Flexibility always means ‘being able to change the operation in some way’. There are different types of flexibility: product/service flexibility, mix flexibility, volume flexibility, and delivery flexibility. Externally, flexibility allows an operation an operation to cater to the wide interests of its customers, produce innovative products and services, adjust to environmental changes and changes in customer demands. Internally, flexibility speeds up response, saves time and helps maintain dependability.
  • Cost structure of different organizations can vary greatly. The other four performance objectives all contribute, internally, to reducing cost. This has been one of the major revelations within operations management over the last twenty years.

Managing Operational Risk: Risk can be defined as a position of loss in relation to your status quo. It refers to the possibility of loss x. Warner (1992:4) argues that the term should not be restricted to the mere likelihood (probability) of an adverse impact but rather to “a combination of the probability, or frequency, of occurrence of a defined hazard and the magnitude of the consequences of the occurrence”.

Defined in this way, hazard becomes a component within risk, making hazard management a subset of risk management (Hood, 1996, 3). Operational risk covers a multitude of issues in the day to day running of the operation including health and safety, fraud, product failure, manufacturing breakdown or quality problems. Different people perceive risks different. Consider for example commonly perceived threats as nuclear fuel, car crashes, handguns and DNA technology. Experts perceive these threats differently than do the public. This is because of heuristics – reasoning strategies adopted by humans in the light of available information.

It is possible for people to underestimate the risk (optimistic bias); over estimate the risk (pessimistic bias; or modify their belief depending on the type and source of information received. Psychometric research reveals that attitudes to risk change when: the hazard is voluntary; when people are familiar with the consequences; the degree to which the consequences are visible; and the uncontrollability of consequences. Public perception of risk is affected by the degree of media coverage, influence of special interest groups, interpretation of specific events and how the person/organization is involved.

Apart from these factors, values and norms play an important role in the perception of risk. In some countries the individual him/herself is considered responsible for making adequate provisions for health care, while elsewhere the family or the general public is expected to take care of its members in cases of sickness (Theil and Ferguson, 2003, 30). Religion is also a factor that impacts public perception of risk. In Islamic countries, belief in predestination constitutes a mentality where risk management appears at least suspicious, if not being perceived as against the will of God altogether. There are also differences due to nationality (Theil and Ferguson, 2003, 30).

Barron and Staten (1996) have shown that members of several ethnic groups in the United States differ significantly in their decisions to purchase credit insurance. Risk management can be understood as a process involving the three basic elements of any control system namely goal-setting (whether explicit or implicit); information gathering and interpretation; and action to influence human behavior, modify physical structures or both (Hood and Jones, 1996, 6).

Risks are rated on the basis of the extent of potential harm or damage, the likelihood that it will occur, possible disruption to business activities and growth, short and long term effects, internal strengths and weaknesses, ability to recover, likely impact on stakeholders and litigation. When risks are not evaluated, business is likely to suffer. They may affect the financial value of the business, the property value of the business, the prices charged, society and politics. The 10 elements of the operation that represent the main risk areas to the success of a business are considered to be (Jeynes, 2001, 3): premises, product, purchasing, people, procedures, protection, processes, performance, planning and policy.

Risks may be managed through different kinds of controls. Physical control involves barrier rails, lifting and handling of equipment, security, locks, insurance cover, etc. Behavioral controls include training, communication systems, responsibilities, boundaries of authority, incentives and rewards, etc. Organizational & Procedural Controls include planned maintenance, health surveillance, emergency procedures, consultation methods, security and authorization arrangements, recruitment and induction, use of management system standards e.g. ISO,IIP.

Business Development

Organizations succeed only they cater to the demands of the customer. There are always competitors trying to satisfy the same customer demands and so operations managers need to provide their organizations with some kind of competitive advantage. Some ways of doing this are: making a unique product like Chanel perfume; using a unique process like Eurotunnel; improving efficiency to give cost advantage like National Coaches; increasing flexibility to customize products like Thomas Cook holidays, etc. This is called having a competitive strategy (Waters, 1999, 6). According to Porter there are three ways of building a competitive strategy: cost leadership, product differentiation and focus.

Business Development Theories

The Hill framework of Operations strategy formulation shows the link between corporate objectives and operations strategy. Determination of corporate objectives such as growth, profit, ROI, etc is the first step that leads to the devise of marketing strategy. Marketing strategy involves segmentation, differentiation, 4 p’s mix, standardization, etc. Once the marketing strategy is ready, strategic plans are made to win orders for products or services and factors to be considered are decided: price, quality, speed, and dependability, brand image, etc. The final step involves operations strategy made up of process choice and infrastructure.

The process choice part of operations strategy deals with process technology, trade-offs embodied in process, role of inventory, capacity, size, timing and location. Infrastructure choices deal with functional support, operations planning and control systems, work structuring, payment systems and organizational structure. New objectives are set based on Operational performance. Thus, corporate objectives are linked to operations strategy.

The Platts-Gregory theory of business development involves the following three steps: develop and understanding of the market position and factors required by market and compare them with actual; identify capabilities; and review the options for improvement

Generally speaking business development has two broad objectives: growth and productivity. An operating strategy aligns products, processes and resources with needs of identified market segments. Depending on the nature of market and nature of products, marketing strategies are developed. Some such marketing strategies for business development include: consolidation and market penetration, market development, product development and diversification. According to Bowman’s strategy clock, organizations have a variation of generic strategies. The organization must have a permanent enduring competence to execute strategy (Norton, 2006).

To implement strategy there has to be a system in place to manage change and changes can happen in products and services, capabilities, resources, supply network and distribution network. Strategy alignment models have the following characteristics: formally link strategic goals with operational objectives; a listing of performance objectives can act as a mediatory step between market positioning objectives and operations strategy; an assessment of the relative importance of operations performance objectives in terms of customer preference and an assessment of performance compared with a competitor.

There are two basic perspectives in strategic thinking – strategic views from the top of the organization and strategic views from the bottom. These different perspectives create different views and different kinds of logics in thinking: a big picture view with logic of proceeding from the general to the specific changes of the future and an operational reality view with logic of proceeding from the specific to the general changes of the future.

In formulating strategy using top down perspective the following steps may be taken: scan the environments of a firm to identify major future trends and changes, interpret the changes as threats and opportunities to the businesses of the firm, analyze the present firms activities in the view of such threats or opportunities, redefine the missions of the firm’s businesses to match future operations to future threats and opportunities, set goals and targets for businesses.

In contrast, using a bottom up approach, the following steps may be taken: examine the currents trends in the market and identify ways to alter these markets, benchmark a firm’s products and processes against competitor’s products and processes, investigate progress in IT, reexamine current operations and identify innovations in operations needed to adapt to changes in market, and formulate a business plan with targets for market share and profits along with required investments and resources needed to achieve the plan. The critical problem in the strategy process of any organization is to facilitate a positive, constructive, and creative interaction between the two perspectives in strategic thinking (Betz, 2001, 17).

Hospitality Business Development

Performance improvement can be achieved on a continuous basis by eliminating waste, reducing defects and organizing effectively. There are two areas of performance improvement: process and quality improvement. In the case of the hospitality industry, process measurement is done by “voice of the process” which involves measuring capability and consistency. This enables the organization to define the parameters of its competitiveness and that of its competitors. The Ritz-Carlton Hotel Company practices the “voice of the process” principle. The organization has service delivery as its core process, which is supported by other including:

  • Six personal service processes such as employee satisfaction, orientation, training/certification, daily line-up meetings, courteous service and pacification of customers who have complained.
  • Nineteen critical work processes that have a direct impact on customer needs from registration, housekeeping, and breakfast to facsimile delivery and billing.
  • Six quality and cost reduction processes: inspection, cost of quality, benchmarking, quality improvement, problem-solving process and error proofing.

Critical performance attributes of quality, cost and timeliness are measured at different levels against goals established by Ritz-Carlton’s Executive Leadership Team. Strategically, measurement is done through inspection process, reviews of guest s and travel planner satisfaction. It is also done operationally through process control tools. Performance against influential external hospitality ratings of customer satisfaction is an additional critical differentiator. Continual process improvement is the underlying principle. This strategy is directed at retaining customers, attracting new ones, providing ROI, reducing the cost of quality and measuring the gains or losses in revenue per available room compared with competitors (Milgate, 2004, 108).

A 1995 benchmark research project by the then Coopers and Lybrand’s Center for Excellence in Customer Satisfaction found that in the hospitality industry, the most successful organizations emphasized five points to create an internal service culture, improve customer satisfaction and facilitate retention. These were (Milgate, 2004, 138):

  • Employee communication, training, skills reviews and levels of job satisfaction all of which contribute to customer well being..
  • Senior management’s visible commitment to a service culture.
  • Customer input to help set service standards.
  • Ensuring that employees actually apply best practices.
  • Backing the customer ethos through training, recognition and incentives.

Underpinning these integrated more holistic approaches to customer measurement are a fundamental belief that there is a causal relationship among customer satisfaction, loyalty, market share, revenues and profits. Globalization is presently a part of effective corporate strategizing, especially in the hospitality business. With the spread of deregulation and privatization of industries following economic liberalism, there is a high level of global competition.

Privatized hospitality businesses have fueled strategic alliances to become and stay efficient and globally competitive. Through strategic alliances, each partner’s unique assets are shared in return for greater global markets. Strategic alliances are set up to exchange technology, gain market entry, lower production costs, and offset exports. Another major benefit of a strategic alliance is that the firms involved can share risks and can help a firm gain knowledge and expertise.

Further, when partners contribute skills, brands, market knowledge, and assets, there is a synergistic effect. The result is a set of resources that is more valuable than if the firms had kept them separate. Similarly, a strategic alliance can help a firm gain a competitive advantage. For example, PepsiCo formed a joint venture with the Thomas J. Lipton Co. to market ready-to-drink teas throughout the United States. Lipton contributed brand recognition in teas and manufacturing expertise. PepsiCo, as the world’s second-largest soft-drink manufacturer, shared its extensive distribution network.

Within the service sector it is the airline industry that is currently the main theatre for alliances, partly because mergers and acquisitions in this industry are often not possible due to authority regulation and government ownership (Aharoni and Nachum, 2000, 258). Airlines seek international competitiveness through alliances. Some alliances are driven by mere cost savings in operations, like through rationalizing ground handling at airports operated by both or all partners.

Others are more of a market power issue, for example through code-sharing and pooled frequent-flyer programs. Yet others may be more of a strategic nature, aiming at the mere survival of the airline (Aharoni and Nachum, 2000, 261). Airlines strategic alliances are of three different forms: equity participation refers to one airline buying equity into another to build an organic tie and to control a target airline; bilateral cooperative alliances mean an agreement between two airlines involving non-equity in dyadic relationships; and network alliances are a group of airlines collaborating on a number of marketing activities (Culpan, 2002, 169).

A strategic alliance between British Airways and American Airlines was created in 1993 and designed to give the two airlines increased access to North American and European markets, respectively. British Airways and Starwood Hotels & Resorts Worldwide, Inc. in April 199 announced the formation of a new marketing partnership between the two companies that began on March 31, 1999 (SHRW, 1999, 1).

For frequent travelers loyal to British Airways, a highlight of the partnership will be the ability to earn British Airways Executive Club Air Miles earnings through stays at nearly 600 participating Starwood hotels in more than 70 countries around the world. More recently in May 2007, HEICO Corporation and British Airways today jointly announced that they had entered into a long term Alternative Parts Supply, Development and Management Agreement. Under the new Agreement, HEICO will exclusively manage British Airways’ Alternative Parts Program helping the airline maximize savings through the use of Alternative Parts in the timeliest way.

Conclusion

Operational Strategy is an important part of business development especially in the Hospitality industry. Strategy refers to a long term plan for the company and operations refer to the processes and products or services of a company. Through operational strategy, companies are able to devise a long term plan to meet its organizational goals making optimum use of its resources. The optimum use of its resources can be measured through operational performance measures. Moreover, in the quest for maximizing efficiency to reaching out to global markets, operational strategy includes strategic alliances where necessary. Thus, in a nutshell, operational strategy refers to the overall pattern of decisions that affect the long term prospects of a company in a positive manner by ensuring that market requirements are met through intelligent use of resources.

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