Professor Stephen Lawrence

1. Professor Stephen Lawrence Defining Operations Leeds School of Business University of Colorado Boulder, CO 80309-0419

2. OPERATIONS… Operations is all about adding value, and creating wealth

3. Definitions • Textbook definition • Organizational definition • Economic definition • Added-value definition

4. What is Operations?Textbook Definition • The design, control, and management of processes that transform inputs into finished goods and services for sale to customers

5. What is Operations?Textbook Definition INPUTS OUTPUTS

6. Who are “operations” managers? • Managers transform inputs into outputs • Example: Accounting Manager • Inputs: data, information, labor • Transformation: application of accounting principles and knowledge • Outputs: accounting reports, knowledge of performance, ... • All managers have an “operation” to run • Therefore:

7. Manufacturing and ServicesContinuum of Characteristics

8. What is Operations?Organizational Definition Corporate Strategy Strategy Business A Strategy Business B Strategy Business C

9. What is Operations?Economic Definition Operations is responsible for improving the “production function” of the firm.

10. Example:Bicycle Manufacturing Capital Used (equipment) per unit produced Labor Used per unit produced

11. Example:Bicycle Manufacturing Capital Used (equipment) per unit produced Labor Used per unit produced

12. What is Operations?Economic Definition Capital Used (equipment) per unit produced Labor Used per unit produced

13. Why Do Firms Exist? “The assumptions of micro-economics, when applied to the question of why there are firms, suggest that firms should not exist at all.” Barney and Ouchi (eds), Organizational Economics, 1986.

14. General approach to economic organization: Markets and firms are alternative instruments for completing a related set of transactions The relative efficiency of each determines which mode is used The costs of writing and executing complex contracts vary with the properties of the market and the characteristics of the human decision makers involved The same human and environmental factors apply to both transactions between firms and within a firm What is Operations?Transaction-Cost Definition [Firms exist because it is difficult to use the price system to coordinate all economic activity.] The question always is, will it pay to bring an extra exchange transaction under the organizing authority? At the margin, the costs of organizing within the firm will be equal either to the costs of organizing in another firm or to the costs involved in leaving the transaction to be “organized” by the price mechanism. Coase, “The nature of the firm,” Economica 4, 1937. Williamson, Markets and Hierarchies, 1975

15. What is Operations?Added-Value Definition • Value is the customer’s subjective evaluation, adjusted for cost, of how well a good or service meets or exceeds expectations. • Note that: • Value is defined in terms of a singular customer • It is a subjective evaluation • The evaluation is compared with an expectation • Expectations can be influenced and do change

16. Cost Operations Marketing Added Value for Customer Added Value Model Finance Accounting Information Systems People and Organization adapted from Porter, Competitive Advantage, Free Press, 1985

17. Added Value Model adapted from Porter, Competitive Advantage, Free Press, 1985

18. Adding Value withMarketing and Operations Marketing Operations

19. What is Operations?Added-Value Definition Operations is the fundamental means by which firms…

20. Greater Productivity Lower costs and expenses Lower prices for the customer Higher Quality Better performance Greater durability, reliability, aesthetics, ... Better Timeliness Faster response and turnaround On-time delivery, meet promises Greater Flexibility Greater variety Customization for customer needs / desires Useful Innovation Features, technology Better performance New capabilities Often unrecognized What is Operations?How do Firms Add Value?

21. The Value Equation