Level 1 - Fit Level 2 - Sustainability Level 3 - Risk

Align resources with requirements Develop sustainable competitive advantage Include impact of uncertainty

This chapter examines the third level of the operations strategy process risk

Nigel Slack and Michael Lewis 2003

Increasing complexity

Real fit over time (requirements evolve and capabilities evolve)

Level of market requirements
e in L B fit of

Internal operational risk (excess capability for current market needs means risk of unexploited capabilities)

External operational risk (Market needs exceeding current level of capability means risk of failing to satisfy the market) Level of operations resource capability

Nigel Slack and Michael Lewis 2003

Pure operations risk

Level of market requirements
e in L fit of

y1

y2

x2
Nigel Slack and Michael Lewis 2003

Level of operations x1 resource capability

Level of market requirements

Speculative operations-related risk

e in L fit of

y4 y5 y3 C

E D F

x3

x5

Level of operations x4 resource capability

Nigel Slack and Michael Lewis 2003

CAUSATIVE EVENT(S)

NEGATIVE CONSEQUENCE

Risk and the operations transformation model

Nigel Slack and Michael Lewis 2003

Level of market requirements

1985

1998
e in L

f of

it

y8

y7

y6

x6

x7

Level of operations resource capability

Speculative operations-related risk at Monsanto (1985-1998)

Nigel Slack and Michael Lewis 2003

Increasingly risk averse

5.00

Line A 4.00 Line B

3.00 0 20 25 30 35 40 45 Age 50 55 60

Age and risk-taking profile

Nigel Slack and Michael Lewis 2003

Level of market requirements

e in L

fi t of

y10 L J

y9

x8

x9

Level of operations x10 resource capability

Subjective operations failure

Nigel Slack and Michael Lewis 2003

OPERATING CONTEXT CAUSATIVE EVENT(S) (corroded storage tank leaks) NEGATIVE CONSEQUENCE (?)

The influence of context on causative events and negative consequences

Nigel Slack and Michael Lewis 2003

4. The negative consequences for all possible stakeholders. This might include generic groups such as concerned citizens, politicians and media.

Generic stakeholder concerns Specific stakeholder concerns Specific operations process concerns

3. The negative consequences for immediate stakeholders (i.e. staff, managers, customers, neighbours). Prone to greater subjective interpretation.

2. The negative consequences for the entire operations process. Might be separated from specific incident by space and time.

Specific event

1. The direct (physical and temporal proximity etc.) negative consequences of an operational incident.

Layers on context for understanding negative consequences

Nigel Slack and Michael Lewis 2003

Three risk control strategies

Prevention

Recovery

Causative event(s)

Mitigation

Negative consequences

Nigel Slack and Michael Lewis 2003

Degree of coupling in the operation Loose Major [1] Tight [2]

Potential crisis

Causal event (failure)

[3]

[4]

Probable control through mitigation

Minor

[6]

[5]

Coupling, mitigation and recovery

Nigel Slack and Michael Lewis 2003

Very undesirable: low pay-off and high risk A Spread of pay-offs for decision X

Very desirable: high pay-off and low risk

The risk-return diagram

Nigel Slack and Michael Lewis 2003

HIGH Value of firm

LOW

Today Time

Probability

mean

2 years

Low

High

Uncertainty cone and outcome distribution

Based on Amram and Kulatilaka, 1999)

Nigel Slack and Michael Lewis 2003

Cone of external uncertainty

Operational assets and capabilities

Cone of uncertainty for investment

Assets and capabilities modifying exposure to uncertainty

Nigel Slack and Michael Lewis 2003