 1

Operations Strategy and

Competitiveness
 OBJECTIVES

Operations Strategy
Competitive Dimensions
Order Qualifiers and Winners
Strategy Design Process
A Framework for Manufacturing
Strategy
Service Strategy (Capacity/Capabilities)
Productivity Measures
 Operations Strategy
Strategy Process Example

Customer Needs More Product

Corporate Strategy Increase Org. Size

Operations Strategy Increase Production Capacity

Decisions on Processes
and Infrastructure Build New Factory
 Competitive Dimensions

Cost
Product Quality and Reliability
Delivery Speed
Delivery Reliability
Coping with Changes in Demand
Flexibility and New Product Introduction
Speed
Other Product-Specific Criteria
 Dealing with Trade-offs
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Order Qualifiers and Winners
Defined
Order qualifiers are the basic criteria
that permit the firms products to be
considered as candidates for purchase by
customers

Order winners are the criteria that

differentiates the products and services of
one firm from another
 Service Breakthroughs
A brand name
car can be an
“order
qualifier”

· Repair services can be “order winners”

Examples: Warranty, Roadside Assistance,
Leases, etc
 Strategy Design Process

Strategy Map What it is about!

Financial Perspective Improve Shareholder Value

Customer Perspective Customer Value Proposition

Internal Perspective Build-Increase-Achieve

Learning and Growth Perspective A Motivated and Prepared

Workforce
 Steps in Developing a
Manufacturing Strategy

1. Segment the market according to the

product group
2. Identify product requirements, demand
patterns, and profit margins of each
group
3. Determine order qualifiers and winners
for each group
4. Convert order winners into specific
performance requirements
 Service Strategy based on
Capacity or Capabilities
Process-based
 Capacities that transform material or information and
provide advantages on dimensions of cost and quality
Systems-based
 Capacities that are broad-based involving the entire
operating system and provide advantages of short lead
times and customize on demand
Organization-based
 Capacities that are difficult to replicate and provide
abilities to master new technologies
What is Productivity?
Defined
 1
1

Productivity is a common measure on how

well resources are being used. In the
broadest sense, it can be defined as the
following ratio:
Outputs
Inputs
 Total Measure Productivity

Total Measure Productivity = Outputs

Inputs

or
= Goods and services
produced
All resources used
 Partial Measure Productivity

Partial measures of productivity =

 Output or Output or Output or Output

Labor Capital Materials Energy
 Multifactor Measure Productivity

Multifactor measures of productivity =

 Output .
Labor + Capital + Energy

or

 Output .
Labor + Capital + Materials
 Example of Productivity
Measurement
You have just determined that your service
employees have used a total of 2400 hours of
labor this week to process 560 insurance
forms. Last week the same crew used only
2000 hours of labor to process 480 forms.
Which productivity measure should be
used?
 Answer: Could be classified as a Total Measure or
Partial Measure.
Is productivity increasing or decreasing?
 Answer: Last week’s productivity = 480/2000 =
0.24, and this week’s productivity is = 560/2400
= 0.23. So, productivity is decreasing slightly.
 Outline
 1
6
Global Company Profile: Komatsu
Identifying Missions and Strategies
 Mission
 Strategy
Achieving Competitive Advantage Through
Operations
 Competing on Differentiation
 Competing on Cost
 Competing on Response
 Outline - continued
 1
7
Ten Strategic OM decisions
Issues in Operations Strategy
 Research
 Preconditions
 Dynamics
Strategy Development and Implementation
 Identify Critical Success Factors
 Build and Staff the Organization
 Integrate OM with Other Activities
 Learning Objectives
 1
8
When you complete this chapter, you should be
able to :
Identify or Define:
 Mission
 Strategy
 Ten Decisions of OM
Describe or Explain:
 Specific approaches used by OM to achieve strategic
concepts
 Differentiation
 Low Cost
 Response
 Komatsu Strategies
1
1960s - licensed designand
9 technology from
others; improved quality
1970s - became global enterprise and built export
markets aided by increasing value of yen
1980s - joint ventures with Dresser, and
manufacturing outside Japan
1990s - used the latest technology to improve
quality and drive down costs; focused on electronic
engine controls
2000s - increased European presence through
ownership and joint ventures
 Komatsu Strategies
 2
0

Each strategy established in light of:

threats and opportunities in the environment

strengths and weaknesses of the organization

(related to environment)
 Mission
 2
1

 Mission - where are you

going?
 Organization’s purpose
for being
 Provides boundaries &
focus
 Answers ‘How can we
satisfy people’s needs?’
 Expressed in published
statement © 1995 Corel Corp.
 Sample Mission - Circle K
 2
2

As a service company, our mission is

to:
Satisfy our customers’ immediate
needs and wants by providing them
with a wide variety of goods and
services at multiple locations.
 Sample Mission - Merck
 2
3

The mission of Merck is to provide

society with superior products and
services - innovations and solutions
that improve the quality of life and
satisfy customer needs - to provide
employees with meaningful work
and advancement opportunities and
investors with a superior rate of
return
 Factors Affecting Mission
 2
4

Philosophy &
Values

Profitability
Environment
& Growth
Mission

Customers Public Image

Benefit to
Society
 Mission/Strategy
 2
5

Mission - where you are going

Strategy - how you are going to get there

 Strategy
 2
6

 Action plan to achieve

mission
 Shows how mission
will be achieved
 Company has a
business strategy
 Functional areas have
strategies © 1995 Corel Corp.
 Strategy Process
 2
7
Company
Mission

Business
Strategy

FunctionalArea
Functional Area
Strategies

Marketing Operations Fin./Acct.

Decisions Decisions Decisions
  2
Competitive Advantage Through:
8

Differentiation

Cost leadership

Quick response
better, cheaper, more responsive
 Competing on Differentiation
 2
9

Uniqueness - can go beyond both the physical

characteristics and service attributes to encompass
everything that impacts customer’s perception of
value
 Competing on Cost
 3
0

Maximum value as perceived by customer

Does not imply low value or low quality
 Competing on Response
 3
1

Flexible
Reliable
Rapid

Requires institutionalization within the firm of the

ability to respond
 Competing On Any Basis
 3
2

Probably requires the institutionalization within

the firm of the ability to change, to adapt
 OM’s Contribution to Strategy
 3
Operations 3 Specific Strategy Competitive
Decisions Examples Used Advantage
Quality FLEXIBILITY
Sony’s constant innovation of new products Design
Product Compaq Computer’s ability to follow the PC market Volume

Process Southwest Airlines No-frills service LOW COST

Location DELIVERY
Pizza Hut’s five-minute guarantee at lunchtime Speed
Layout Federal Express’s “absolutely, positively on time” Dependability Differentiation
(Better)
Human Resource
QUALITY
Motorola’s automotive products ignition systems Conformance Response
Supply Chain Cost leadership (Faster)
Motorola’s pagers Performance (Cheaper)
Inventory

Scheduling IBM’s after-sale service on mainframe computers AFTER-SALE SERVICE

Maintenance Fidelity Security’s broad line of mutual funds BROAD PRODUCT LINE
 10 Decision Areas of OM
 3
4
Goods & service design
 Quality
 Process & capacity design
 Location selection
 Layout design
 Human resource and job design
 Supply-chain management
 Inventory
 Scheduling
 Maintenance
 Goods & Services and the 10
Operations Management Decisions
Operations Goods Services
Decisions
Goods & Product is usually Product is usually
services tangible intangible
decisions
Quality Objective quality Subjective quality
standards standards

Process Customer not involved Customer may be directly

and in most of process involved in process.
capacity Capacity must match
design demand to avoid lost sales
 35
 Goods & Services and the 10
Operations Management Decisions
Operations Goods Services
Decisions
Location May need to be near raw Product is usually
Selection materials or labor force intangible
Layout Layout can enhance Subjective quality
Design production efficiency standards
Human Workforce focused on Customer may be directly
Resources technical skills. involved in process.
and Job Labor standards consistent. Capacity matches
Design Output-based wage system. demand to avoid lost
sales

 36
 Goods & Services and the 10
Operations Management Decisions
Operations Goods Services
Decisions
Supply chain Supply-chain Supply-chain relationships
management relationships critical to important, not necessarily
final product critical
Inventory Raw materials, work- Most services cannot be
in-process, and stored
finished goods
Scheduling Ability to convert Primarily concerned with
inventory may allow meeting the customer's
leveling of production immediate schedule
rates
 37
 Goods & Services and the 10
Operations Management Decisions
Operations Goods Services
Decisions
Maintenance Maintenance is often Maintenance is often
preventive and takes "repair" and takes place at
place at the production the customer's site
site

 38
 Operations Strategies for Two Drug
Companies
 3
9
Brand Name Drugs, Generic Drug Corp.
Inc.
Competitive Product Differentiation Low Cost
Advantage
Product Heavy R&D; Little R&D
Selection Extensive Labs
and Design
Quality Quality is a major Meets regulatory requirements on
priority; a country-by-country basis as
Standards exceed necessary
regulatory
requirements
 Operations Strategies for Two Drug
Companies - continued
 4
0
Brand Name Drugs, Generic Drug Corp.
Inc.
Processes Product & modular Process focuses
production processes General production processes;
Long product runs in Job Shop approach, short run;
specialized facilities Focus on high utilization
Build capacity ahead
of demand
Location Still located in city in Recently moved to low tax, low labor cost
which it was founded environment
Scheduling Central production Many short run products complicate
planning scheduling
 Operations Strategies for Two Drug
Companies - continued
 4
1
Brand Name Drugs, Generic Drug Corp.
Inc.
Human Hires the best; nation- Very experienced top executives
Resources wide searches provide direction; other
personnel paid below average
Supply Long term supplier Tends to purchase competitively
Chain relationship to find bargains
Inventory Maintains high finished Process focus drives up WIP
goods inventory, inventory.
primarily to ensure all Finished goods inventory tends
demands are met to be low
 Operations Strategies for Two Drug
Companies - continued
 4
2

Brand Name Drugs, Generic Drug Corp.

Inc.
Maintenance Highly trained staff; Highly trained staff to meet
Extensive parts challenging demands
inventory
 Characteristics of43 High ROI Firms


High quality product

High capacity utilization
High operating effectiveness
Low investment intensity
Low direct cost per unit

From the PIMS study of the Strategic

Planning Institute
Strategic Options Managers Use to Gain
Competitive Advantage
 4
4

28% - Operations Management

18% - Marketing/distribution
17% - Momentum/name recognition
16% - Quality/service
14% - Good management
 4% - Financial resources
 3% - Other
Strategic Options Managers Use to Gain
Competitive Advantage
 4
5

28% Operations Management

 Low- cost product
 Product-line breadth
 Technical superiority
 Product characteristics/differentiation
 Continuing product innovation
 Low-price/high-value offerings
 Efficient, flexible operations adaptable to
consumers
 Engineering research development
 Location
 Scheduling
 Strategic Options Managers Use
to Gain Competitive Advantage -
continued
4
6


18% Marketing/Distribution
17% Momentum/name recognition
16% Quality/service
14% Good management
 4% Financial resources
 3% Other
 Preconditions -
To Implement a Strategy
 4
7

One must understand:

 Strengths & weaknesses of competitors and
new entrants into the market
 Current and prospective environmental, legal,
and economic issues
 The notion of product life cycle

 Resources available with the firm and within

the OM function
 Integration of OM strategy with company
strategy and with other functions.
 Impetus for Strategy Change
 4
8

Changes in the organization

Stages in the product life cycle
Changes in the environment
 Stages in the Product Life Cycle
 4
9

Introduction
Growth rate

Growth

Maturity

Decline
 Strategy and Issues During a
Product’s Life
 5
0
Introduction Growth Maturity Decline
Best period to Practical to change price Poor time to change image, Cost control
increase market share or quality image price, or quality critical
R&D product Strengthen niche Competitive costs become
engineering critical critical
Defend market position
Company Strategy/Issues

Drive-thru restaurants Fax machines

3 1/2”
CD-ROM Floppy disks

Sales
Station
Internet wagons
Color copiers

HDTV

Product design and Forecasting critical Standardization Little product differentiation

development critical Product and process reliability Less rapid product changes - Cost minimization
Frequent product and process Competitive product more minor changes
design changes improvements and options Overcapacity in the
Optimum capacity industry
OM Strategy/Issues

Short production runs Increase capacity Increasing stability of

Shift toward product focused process Prune line to eliminate
High production costs
items not returning good
Limited models Enhance distribution Long production runs margin
Attention to quality Product improvement and
cost cutting Reduce capacity
Strategy & Issues During
5
Product

Life
1
Introduction
Company Best period to increase market share
Strategy & R&D engineering are critical
Issues
Product design and development are critical
Frequent product and process design
changes
OM Over-capacity
Short production runs
Strategy & High skilled-labor content
Issues High production costs
Limited number of models
Utmost attentions to quality
Quick elimination of market-revealed design
defects
Strategy & Issues During Product Life
 5
2
Growth

Company Practical to change prices or quality

Strategy image
Marketing is critical
& Issues Strengthen niche

Forecasting is critical
OM Strategy Product and process reliability
& Issues Competitive product improvements and
options
Shift toward product oriented
Enhance distribution
Strategy & Issues During Product Life
 5
3
Maturity
Poor time to increase market share
Company Competitive costs become critical
Poor time to change price, image, or quality
Strategy Defend position via fresh promotional and
& Issues distribution approaches

Standardization
Less rapid product changes and more minor annual
model changes
Optimum capacity
OM Strategy Increasing stability of manufacturing process
& Issues Lower labor skills
Long production runs
Attention to product improvement and cost cutting
Re-examination of necessity of design compromises
Strategy & Issues During Product Life
 5
4
Decline

Company Cost control critical to market share

Strategy
& Issues
Little product differentiation
Cost minimization
OM Strategy Overcapacity in the industry
& Issues Prune line to eliminate items not returning
Good margin
Reduce capacity
Strategy Development and Implementation
 5
5

Identify critical success factors

Build and staff the organization
 SWOT Analysis Process
 5
6

Environmental Analysis

 Determine Corporate Mission

 Form a Strategy
 Identifying
Critical Success Factors
 5
7
Marketing Finance/Accounting Production/Operations
Service Leverage
Distribution Cost of capital
Promotion Working capital
Channels of distribution Receivables
Product positioning Payables
(image, functions) Financial control
Lines of credit

Decisions Sample Options

Product Customized, or standardized
Quality Define customer expectations and how to achieve them
Process Facility size, technology
Location Near supplier or customer
Layout Work cells or assembly line
Human resource Specialized or enriched jobs
Supply chain Single or multiple source suppliers
Inventory When to reorder, how much to keep on hand
Schedule Stable or fluctuating productions rate
Maintenance Repair as required or preventive maintenance
 Critical Success Factors
Microsoft & Compaq
 5
8

 They focus on one business

 They are global
 Their senior management is actively involved in
defining and improving the product development
process
 They recruit and retain the top people in their
fields.
 They understand that speed to market reinforces
product quality
Activity Mapping: Southwest Airline’s
Low Cost Competitive
5
Advantage

9

Courteous, but limited

passenger service

Lean, productive Competitive Short haul, point-to-point

employees routes, often to secondary
Advantage:
airports
Low Cost
High aircraft
utilization Frequent, reliable
schedules
Standardized fleet of
Boeing 357 aircraft
Activity Mapping: Southwest Airline’s
Low Cost Competitive
6 
Advantage
0

Courteous, but limited

passenger service

No seat assignments
No baggage transfers
Automated ticketing machines
No meals
Activity Mapping: Southwest Airline’s
Low Cost Competitive
6
Advantage

1

Lower gate costs at

secondary airports Short haul, point-to-point
routes, often to secondary
High number of flights, airports
reduces employee idle
time between flights
Activity Mapping: Southwest Airline’s
Low Cost Competitive
6
Advantage

2

High number of flights reduces

employee idle time between
flights
Saturate a city with flights
flowering administrative costs
Frequent, reliable
per passenger for that city schedules
Activity Mapping: Southwest Airline’s
Low Cost Competitive
6
Advantage

3

Pilot training on only one type of

aircraft
Reduced maintenance inventory
required because of only one type
of aircraft
Excellent supplier relations with
Boeing has aided financing

Standardized fleet of
Boeing 357 aircraft
Activity Mapping: Southwest Airline’s
Low Cost Competitive
6
Advantage

4

Flexible employees and

standard planes aids scheduling
Flexible union contracts
Maintenance personnel trained
on only one type of aircraft
High aircraft 15 minute gate turnarounds
utilization
Activity Mapping: Southwest Airline’s
Low Cost Competitive
6
Advantage

5

High level of stock ownership

Hire for attitude, then train
Lean, productive
High employee compensation
employees Empowered employees
Automated ticket machines
Activity Mapping: Southwest Airline’s Low Cost
Competitive6 Advantage

6

Courteous, but limited

passenger service

Lean, productive Competitive Short haul, point-to-point

employees routes, often to secondary
Advantage:
airports
Low Cost
High aircraft
utilization Frequent, reliable
schedules
Standardized fleet of
Boeing 357 aircraft
 Vanguard’s Activity System
 6
7

A broad array of mutual

funds excluding some fund
categories
Very low Efficient investment
expenses management approach
passed on to offering good consistent
client performance
Strict cost
control
Straightforward client
Direct
communication and
distributions
education
 How It Works
 6
8

If competitive Distinctive
advantage, leads to Company
competencies
achieving Mission
affect
Business
Strategy

Functional Area
Strategies

Marketing Operations Fin./Acct.

Decisions Decisions Decisions