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UNORTHODOX TECHNIQUE PROVIDES VALUABLE INSIGHT IN EVALUATING A COMPANY'S OPERATIONS, ACCORDING TO SIMON SCHOOL PROFESSOR
Economics and Scientific Method Should Be Utilized; Can Impact M.B.A. Education
Rochester, N.Y., May 8, 1997--Economic models and proven scientific procedures must be the foundation for operations problem solving in today's business environment, a new paper indicates.
In "Perspectives on Operations Strategy and Economics," Phillip J. Lederer, associate professor of operations management at the William E. Simon Graduate School of Business Administration, asserts that by utilizing an operations strategy that takes into account the scientific method, microeconomics and operations research, a company will gain stronger and more insightful information on how certain decisions affect the cost and demand of products or services.
The paper, which reflects Lederer's teaching philosophy, is significant for the field of business consulting because it emphasizes a much more systematic process for finding business solutions than consultants often employ. Lederer's interdisciplinary approach fuses operations research (which analyzes costs) and microeconomic theory (which analyzes demand) by borrowing several basic economic concepts and applying them to operations. The combination of these two disciplines, Lederer asserts, provides greater insight into operations problems, hence allowing managers and consultants to make better- informed, more strategically sound decisions.
When discussing the paper, Lederer suggests that economic models and the scientific method are often overlooked by today's mega-consultants and so-called strategy gurus. "You see managers flocking to gurus for wisdom on what the big corporate tradeoffs are," Lederer contends. "But very few of these consultants use economics to drive their prescriptions, and so quite often they are wrong. They observe success in the marketplace, and then look for ways to replicate that success. But the fact is that the economic models I've outlined are really at the root of the phenomena they observe and are very complex."
In his paper, Lederer points to several issues in which applying operations strategy would yield significant findings:
Facility Location and Pricing--Most companies select a location for a new facility based upon minimizing production and transportation costs. By incorporating operations strategy, however, the company would use economic models to also consider the effect a given location would have on demand, profits, price and even competition.
Technology, Financing and Investment Decisions--Operations strategy asserts that a company's financing and investment decisions must be made in conjunction with technology choices. By utilizing the capital asset pricing model (CAPM), a company can more accurately determine the value of a financing decision based upon its current technology. Investment decisions must take into account this technology. For example, more flexible technology can increase a firm's ability to finance with debt.
Time-Based Competition--With quick response time increasingly becoming a valuable strategic weapon for global competition, operations strategy can provide insights about when a firm ought to adopt a quick-response strategy. Economic models can capture the effect of responsiveness on prices, customer demands and profit. "A firm may use its ability for fast production to operate at high-capacity utilization," explains Lederer. "This would lengthen response time, but reduce costs. Thus, fast production is not equivalent to quick response."
By teaching the importance of economics in operations strategy, Lederer aims to better prepare his M.B.A. students for careers as consultants and business strategists. "M.B.A. students often imagine themselves in the attractive role of the ultimate decision maker, or highly paid consultant-advisor," says Lederer. By combining operations with economics, Lederer strives to teach his students sharper, more systematic methods of business analysis.
Lederer concludes his paper by suggesting that principles from other management functions should similarly be applied to operations. "Other business functions, especially finance, marketing, accounting and human resources, are necessary to understand business impact on long-term operations decisions," Lederer asserts. "This knowledge will reveal the true effect of these decisions." # # # The Simon School was recently ranked among the top 20 U.S. graduate business schools by U.S. News & World Report, and among the top 25 by Business Week. The School, recognized worldwide for its leading scholarship in education, offers a distinctive approach to business education because of its flexibility, innovation, youth, size, global outlook and vision.
EDITOR NOTE: Copies of Phillip J. Lederer's paper "Perspectives on Operations Strategy and Economics" are available upon request. Please call the Simon School's Office of Public Affairs at 716-275-3736; fax: 716-275-9331; e-mail [email protected].
Information about the Simon School is also available on the World Wide Web at http://www.ssb.rochester.edu.
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