The environment of operations and its relevance – a literature review

Skinner (1969) advocates the importance of a ‘fit’ between strategy (S), the environment (E) and performance (P) through his emphasis on the ‘focussed factory’, which may be regarded as a starting point for much of the conceptual basis of the importance of the environment and the E-S-P paradigm in the field of manufacturing and operations, in the last three decades.

Following this, and as pointed out by the operations strategy literature reviews carried out by Anderson et al. (1989) and Leong et al. (1990), there is broad support for the conceptual existence of the E-S-P paradigm within the operations domain (Ward and Duray, 2000).

Skinner (1969), for example, is significant in prescribing poor performance as a consequence for firms with a poor fit in this relationship in his seminal contribution, though only from a conceptual viewpoint. The essence of the environment, strategy, and performance

relationship can be gauged from the following quote:

“The purpose of manufacturing is to serve the company-to meet its need for survival, profit, and growth. Manufacturing is a part of the strategic concept that relates a company’s strengths and resources to opportunities in the market. Each strategy creates a unique manufacturing task. Manufacturing management’s ability to meet the task is the key measure of its success” (p. 140).

This implies that there should not only be a fit between firm strategy, firm environment and its performance but also (may be interpreted) as the environment triggers firm strategy, which in turn adapts and adjusts to achieve performance. However, as Ward and Duray (2000) point out, even though this relationship has continued to exist and dominate operations strategy in terms of its conceptual underpinnings, it is only fairly recently that the relationship has been empirically put to test. Therefore, issues of antecedence, causality, directionality, form and nature of this relationship have come to occupy a large part of operations domain. A documentation of this part of literature, or sub-domain in operations, is called for here as it has explicitly sought to operationalise the environment, and its attributes. Therefore, this line of thinking is of interest to the present dissertation.

A well-acknowledged contribution in this direction is that of Swamidass and Newell (1987), where they put to test their contingency theory based model of manufacturing strategy using a path analytic approach. Their basic premise is the sequential relationship amongst the external environment, strategy and business performance variables. Manufacturing strategy (as a subset of corporate and business strategy), its content and process, and its considerations in the broader context of its environment and business performance, is essentially the focus

of this work. Although there are self-admitted concerns about generalisability of their findings in light of industry effects affecting the sample, Swamidass and Newell (1987) demonstrate that environmental uncertainty influences manufacturing strategy content and process, which in turn makes a measurable impact on the performance of a business. They cite Van Dierdonck and Miller (1980) as the lone empirical study, which considers the relationship between the environment and operations strategy, preceding their study.

Ward et al. (1995) employ structural equation modelling to shed light on the links between operations strategy, environment and performance from a sample of Singapore manufacturers (NIC context) and to describe the nature of the relationship. Their models show that high and low performers emphasise differently on their competitive priorities, even though they are faced with similar environmental concerns. Though the essence of their contribution is the same, their work differs subtly from that of Swamidass and Newell (1987), described by them as:

“In addition to a more complete rendering of environmental concerns...(1) the sample is broader in industry coverage and larger in size; (2) the model is restricted to operations strategy content rather than content and process, but covers content somewhat more completely; (3) the geographic locale is different; and (4) covariance structure modelling is used to estimate the path model”, (p. 100).

The causality of the (E-S-P) relationship is upheld by demonstrating that factors in the environment sparks the choice of an operations strategy, which in turn translates into performance. Ward et al. (1995) leave out of complexity while choosing to focus on the dimensions of dynamism and munificence in the environment:

“…future efforts should include measures which capture environmental complexity, a dimension not explored in this present research”, (p. 112).

Williams et al. (1995) investigated a sample of 85 firms in a mature industry context (the fabric industry), and found a significant relationship between a firm’s business level strategy, its manufacturing strategy and performance. In a similar vein, the essence of Badri et al.

(2000) lies in exploring and testing the idea of strategic response to (perceived)

environmental dynamism in a developing industry context. Strategic response is explored in terms of the chosen operations strategy attributes of cost, quality, delivery and flexibility.

This is then related to business performance in a developing country context i.e. the United Arab Emirates. Their findings, though upholding the existence and nature of the

environment-strategy-performance relationship, has implications in terms of the different nature of environmental concerns in mature and emerging countries or manufacturing

contexts. Moreover, environmental concerns such as ‘government laws and regulations’ and

‘political considerations’ are also important variables to be considered in a developing country context. Again, as Badri et al. (2000) explicitly state the exclusion of environmental complexity as opposed to munificence and dynamism in their study, there is some confusion regarding this exclusion because ‘government laws and regulations’ and ‘political

considerations’ may generally be linked to the environmental complexity dimension. On the importance of the environment to operations, they suggest:

“…. researchers should build into virtually all research design explicit consideration to environmental factors. Environment should be included for substantive and

methodological justifications”, (p. 170).

Ward and Duray (2000) provide an important extension to the E-S-P paradigm, which is the topic of the present review. Although, it should be pointed out that the contingency theory perspective and the path analytic method used in their investigation remains the same as in previous studies. They explicitly make a differentiation between manufacturing strategy, which is a functional level strategy, and competitive strategy, which is more representative of corporate strategy. Then they test the relationships as shown in Fig. 21 and find that

relationships 1a, 1b and 1c between the firm’s environment, its competitive strategy,

manufacturing strategy and performance hold. This “obvious” finding upholds the conceptual literature within operations management and strategy. By thus doing, they not only

empirically test the relationship but also manage to define the broader strategic context of manufacturing strategy in terms of a firm’s competitive strategy. Their findings also dismiss relationships 2 and 3 i.e. direct independent effects of the environment on manufacturing strategy, and that of competitive strategy on performance respectively:

“From the perspective of operations management, the paths between each of the competitive strategies and the manufacturing strategy dimensions are of great interest…competitive strategy of differentiation is linked with each of the manufacturing strategy variables”, (p. 134).

Ward and Duray’s (2000) study reveals the mediating effect of competitive strategy and confirms that environmental dynamism has an important effect on manufacturing strategy

“but that influence is articulated through and modified by competitive strategy” (p. 135).

Some important research implications of their study are that any model of manufacturing strategy must simultaneously include competitive strategy variables in order to capture the context of functional (manufacturing) strategies correctly. And following this, a case may be made that any model on (manufacturing or operations) performance or competitiveness must include all in the same i.e. variables of the environment, competitive strategy and

manufacturing/operations strategy to capture the context of performance. Most notably since their study provides empirical evidence that in high performance firms a) there is a fit between the environment, strategy and performance, and b) competitive strategies of the firms are “inextricably” linked to their manufacturing strategy, a case can be made that the understanding of these links, the processes behind their design and management, is a neglected research area. As they point out this important lacuna in research:

“The importance of the close coupling between competitive and manufacturing strategies among high performance manufacturers raises interesting questions about how such coupling can be accomplished. Hill (1994) provides one methodology for achieving such a coupling and also points out many potential pitfalls in the process.

Adam and Swamidass (1989) and others point out that manufacturing strategy process research has been neglected relative to content research. The content research findings reported here underline the importance of process research for developing an understanding how firms establish close linkages between competitive and operations strategy without adopting bureaucratic strictures that impede

responsiveness”, (Ward and Duray, 2000, p.134)

Anand and Ward (2004) work on the same relationship, though following a different

approach, which suggests the moderating role of the environment in the relationship between flexibility (strategy) and performance. They argue that flexibility is still a viable option even though the environment is less dynamic or differently dynamic. It follows that each type of environment demands a different type of flexibility strategy i.e. mobility flexibility in unpredictable environment, whereas, range flexibility for volatile environments. The theoretical implication for operations is that a fit between environmental conditions and flexibility strategy matters with respect to business performance.

An important managerial implication is that managers should recognise the specific environmental challenges faced by their business and choose the appropriate flexibility approach. Yet again, the focus on environment in their paper deals with environmental dynamism and they concede that a broader theoretical map of environmental conditions and specific types of operations strategy is required.

To summarise, the focus here has been to conceptualise the environment-strategy-performance (E-S-P) relationship and empirically test whether there exists a significant relationship between (perceived or objective) environmental dimensions, (corporate, business or operations) strategy and business environment. The E-S-P paradigm assumes a

hierarchical view on strategy and advocates a causal fit between firm strategy, its environment and performance. A similar trend in conceptually incorporating the E-S-P

paradigm into supply chain operations was found to be emergent in logistics literature, where Defee and Stank (2005) put forth propositions using E-S-P paradigm in the supply chain context. It was then inferred that the research stream cited here, in fact focuses on why the environment, environmental uncertainty and its referents are important for organisational operations, and that in each case, the inbuilt contingency argument helped framing theoretical models that sought to confirm this.

Figure 21

“Conceptual model of manufacturing strategy in its context”

(Ward and Duray, 2000)

3.4.2. The environment of operations and its application – a