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Judging OPERATiOns PERfORmAnCE AT A sTRATEgiC lEvEl 53
alternative policy options), what would it be? Or, to put the issue even more simply: How do
we want the firms in our economy to measure their own performance? How do we want them
4
to determine what is better versus worse?’ He also holds that using stakeholder perspec-
tives gives undue weight to narrow special interests who want to use the organisation’s
resources for their own ends. The stakeholder perspective gives them a spurious legiti-
macy that ‘undermines the foundations of value-seeking behaviour’.

Judging operations performance at a strategic level

It is a central idea in operations management that the type of decisions and activities
that operations managers carry out can have a significant strategic ‘impact’. There-
fore, if one is assessing the performance of the operations function, it makes sense to
ask what measures can be used to judge how it impacts on the organisation’s strategic
‘economic’ position. These measures of performance tend to be aggregated from, and
strongly influenced by, the operational measures that we will examine later. They are
shown as the intermediate level in Figure 2.2. They are cost, revenue, capital, risk and
building capabilities.

Operations affects costs

It seems almost too obvious to state, but almost all the activities that operations man-
agers regularly perform (and all the topics that are described in this book) will have an
affect on the cost of producing products and services. Clearly the efficiency with which
an operation purchases its transformed and transforming resources, and the efficiency
with which it converts its transformed resources will determine the cost of its products
and services. And for many operations managers it is the most important aspect of how
they judge their performance. Indeed, there cannot be many, if any, organisations that
are indifferent to their costs.

Operations affects revenue

Yet cost is not necessarily always the most important strategic objective for operations
managers. Their activities also can have a huge effect on revenue. High-quality, error-
free products and services, delivered fast and on-time, where the operation has the
flexibility to adapt to customers’ needs, are like to command a higher price and sell
more than those with lower levels of quality, delivery and flexibility. And operations
managers are directly responsible for issues such as quality, speed of delivery, depend-
ability and flexibility, as we shall discuss later in the chapter.
The main point here is that operations activities can have a significant effect on,
and therefore should be judged on, the organisation’s profitability. At a simple (and
simplistic) level, profit is the difference between the costs of producing products and
services and the revenue the organisation secures from its customers in exchange. (In
public sector operations an equivalent, although difficult to measure, performance
metric could be ‘welfare per unit of expenditure’). Moreover, even relatively small
improvements on cost and revenue can have a proportionally even greater effect on
profitability. For example, suppose a business has an annual revenue of 1,000,000 and
annual costs of 900,000, and therefore a ‘profit’ of 100,000. Now suppose that, because

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