Chapter Two

Operations Strategy &

Competitiveness
 There is an old saying that goes,
“ If you don’t know where you are going, any
road will do”
 2.1 Definition – Operations Strategy

 It is the process of setting plans for using the resources

of the firm to best support the firm’s long- term
competitive advantage
 Strategies exploit opportunities and strengths,
neutralize threats, and avoid weaknesses
 Operations strategy answers the question: How can a
firm’s operations function best contribute to the
organization’s overall strategy?
 So, it guides how you pursue the goals of adding value
using your key business
Operations Strategy
 The Big Picture
Corporate Strategy
How the organization is going to pursue its mission.

Operations Strategy
Operations is organization’s core business function
Operations strategy is how that core business function is
going to add value in support of the corporate strategy
It requires continuous, cross-functional interaction
The operations strategy should be customer driven
 Strategic Process
Organization’s
Mission

Functional Area
Missions

Marketing Operations Finance/

Accounting
 Operations Strategy

Strategy Process Example

Customer Needs More
Product/Quality

Increase Org.
Corporate Strategy
Size/use better
tech
Increase Production
Operations Strategy
Capacity/Invest on R&D

Decisions on Processes
and Infrastructure Build New Factory
 Mission/Strategy/Tactics

Mission Strategy Tactics

Mission: The reason for existence for an

organization
Mission Statement: States the purpose of an
organization
Goals: Provide detail and scope of mission
Strategy: Plans for achieving organizational
goals
Tactics: The methods and actions taken to
accomplish strategies
 Strategy Formulation
• Environmental scanning … SWOT
• Building distinctive competencies
• Order qualifiers:
• Characteristics that customers perceive as minimum standards
of acceptability to be considered as a potential purchase
• Order winners:
• Characteristics of an organization’s goods or services that
cause it to be perceived as better than the competition
• Order wining & order qualifying criterion change over
time
 Competitive Dimensions
• Cost
• Quality and Reliability Competitiveness:
• Delivery How effectively an organization meets
– Flexibility the wants and needs of customers
– Speed relative to others that offer similar
– Reliability goods or services.
• Coping with Changes in Demand
• Customer Value: customer benefits – customer cost
• New Product Introduction
– Speed
– Flexibility
 Dealing with Trade-offs
For
For example
example I:I: ifif we
we reduce
reduce costs
costs by
by reducing
reducing product
product
quality
quality inspections,
inspections, we we might
might reduce
reduce product
product quality
quality

Example
ExampleII:II:ififwe
weimprove
improve
customer
customerservice
serviceproblem
problem
solving
solvingby
bycross-training
cross-training Cost
personnel
personneltotodeal
dealwith
withaawider-
wider-
range
rangeof
ofproblems,
problems,theytheymaymay Flexibility Delivery
become
becomeless
lessefficient
efficientatatdealing
dealing
with
withcommonly
commonlyoccurring
occurring
problems. Quality
problems.
 Cont’d …
 The Operation function focuses on:
 Cutting costs on the system such as materials, labor
and facilities
Study the operation system carefully to eliminate
waste
Offering training to employees to maximize
productivity and minimize scrap
Automating the operations system of the company so
that productivity will be increased
Both Order Winners and Qualifiers can become
Order Losers, if:
• Quality
• Delivery
• Speed
• Reliability
• Any other factors that made customers look to you,
suddenly become unacceptable

 So what shall the operations manager do ?

The four-stage model of Operations contribution
to the business

• Redefining industry
STAGE 4
expectations Give an
Increasing strategic impact

o f operations
o n
u ti advantage
tr ib STAGE 3
• Clearly the best n Link strategy with
co operations g
in the industry sing i
iv y
n
crea tionSTAGE
s 2 i ng Dr ateg
• As good as the In era Adopt best por t str
op p y
competitors practice ting Su teg a
STAGE 1 e n str
• Holding the Correct worst plem tegy
organization problems Im stra
back Internally Externally Internally Externally
neutral neutral supportive supportive

Increasing operations capabilities

How can the contribution of the operations
function be assessed?
Neutral Supportive

Internally Stage 1 Stage 3

Objective: To Objective: To
minimize the provide credible
negative impact of support for the
operations business strategy

Externally Stage 2 Stage 4

Objective: To help Objective: To
the business provide source of
maintain parity with competitive
its competitors advantage
 Impact of Competitor Activity

Original Strategy
Order winners Fast delivery
Competitor’s Strategy
Qualifiers Range, Price
Order Fast delivery
winners Range Performance Speed
Qualifiers Price objectives

Performance Speed and

objectives Flexibility

Alternative Strategy 2 Alternative Strategy 3

Alternative Strategy 1
Order Faster Order Price
Order Fast winners
winners delivery winners delivery
Qualifiers Price
Range Qualifiers Range, Price Qualifiers Fast delivery
Range
Performance Speed and Performanc Speed Performance Cost
objectives Flexibility objectives
e objectives
The Hill Methodology of Strategy Formulation

Step 1 Step 2 Step 3 Step 4 Step 5

How do Operations Strategy
Corporate Marketing products
objectives strategy or services Process Infrastructure
win orders? choice

Growth

Profit

ROI

Other
‘financial’
measures
Cont’d ...

Step 1 Step 2 Step 3 Step 4 Step 5

Operations Strategy
Corporate Marketing How do goods
strategy or services
objectives Process Infrastructure
win orders?
choice
goods/Service Price Functional
Growth Process
markets & Quality support
segments Delivery speed technology
Operations
Range Delivery Trade offs planning and
Profit dependability embodied in control systems
Mix process
goods /service Work
Volumes range
ROI Role of structuring
Standardisation goods /service inventory
Payment systems
Other or customisation design
‘financial’ Innovation Capacity, size, Organisational
Leader or Brand image timing, location. structure
measures follower Technical service
 Example - the south west airline compete on
cost
• Its operation function is designed to support cost
strategy
– Facilities are streamlined
– Only one type of airplane is used
– Short flight routs
– All unnecessary costs are eliminated
– Employees are trained to perform many functions
• Because of this strategy south west has been a
model for the airline industry for many years
 Cont’d …
2. Quality - as a competitive priority has two dimensions:
– High performance design
– Product and service consistency
• A company that competes on this dimension needs to
implement quality in every area of the organization
– Product design
– Process Design
 Cont’d …
3. Delivery Time - Companies in all industries are
competing to deliver high-quality products in as short a
time as possible.
– The job of the operations function is to critically
analyze the system and combine or eliminate
processes in order to save time.
– Use technology to speed up processes and flexible
work forces to meet peak demands
 Cont’d …
4. Flexibility- the ability of a company to readily
accommodate the changes in the environment - can be a
winning strategy.
• Flexibility types.
– Product flexibility
– Volume flexibility
– Process flexibility
• To carry out this strategy, flexible companies tend to
have
– More general-purpose equipment
– Skilled and semiskilled workers
Improving Responsiveness to Customers
 Without customers, organizations cease to exist.
• Non-profit and for-profit firms all have customers.
• Managers need to identify who the customer is and
their needs.
 What do customers want? Usually customers prefer:
• A lower price to a higher price
• High quality over low quality
• Fast service over slow service
– Also good after sale support
• Many features over few features
• Products tailored to their specific needs
 Competitiveness Value Map
Higher Premium
Poor value
value
Relative Price

Average
value

Economy
value Outstanding
value

Lower

Inferior Relative Quality Superior

 10 Strategic OM Decisions
1. Goods and service 6. Human resources and
design job design
2. Quality
7. Supply chain
3. Process and capacity management
design
4. Location selection 8. Scheduling
5. Layout design 9. Maintenance
10. Inv.mgt
 Case : A Bank Manager
• The managing director of a bank believes that improved
customer service is the best way for us to differentiate
ourselves from competitors and attract new customers. We can
offer our customers better service by reducing waiting time in
teller lines from an average of six minutes to an average of
three. By opening for business at 8:30 instead of 9:00, and by
remaining open for an additional hour beyond our current
closing time, we will be better able to accommodate the busy
schedules of our customers. These changes will enhance our
bank’s image as the most customer-friendly bank in town and
give us the edge over our competition.
• Critically evaluate the argument of the bank manager, does it
work? Justify.
 Core Competencies
• Core Competencies are resources and capabilities that
can serve as a source of Competitive Advantage
• Organization’s core competency solely relies on
heterogeneity of resources and capabilities they have:
• Durability; Transparency; Transferability; and
Replicability - (Prahalad and Hamel, 1990)
• Conformance quality: ability to build a product to design
specifications
• Product reliability:
• Delivery dependability:
Resources and capabilities lead to Competitive
Advantage when they are:

Valuable allow the firm to exploit opportunities or

neutralize threats in its external environment

Rare possessed by few, if any, current and potential

competitors

Costly to Imitate when other firms either cannot obtain

them or must obtain them at a much
higher cost

Nonsubstitutable the firm must be organized appropriately to

obtain the full benefits of the resources in order
to realize a competitive advantage
 Competitive priorities
• Competitive priorities are goals and objectives (e.g. large
product variety and low product costs) that guide
management actions (Koufteros et al., 2002)
• Teece and Pisano (1994) stated that management’s role is
to organize these competencies to create capabilities that
customer’s desire
• Strategy Begins with Priorities
Competition Us
(Them) Differentiation (Core competencies)

• Competitive capabilities are more direct

antecedents to the economic outcome of the firm
2.2 Manufacturing Vs Service Operations
Service Characters
• Intangible
• Inventory (Perishability)
• Inseparability
• Inconsistency (Variability)
• Heterogeneity/Variability
• Ownership
• Customer contact
• Labor Intensity
• Information asymmetry
 Developing Manufacturing Strategy
 Objectives:
• Translate required priorities (typically obtained from marketing)
into specific performance requirements for operations
• Make the necessary plans to assure that operations (and
enterprise)capabilities are sufficient to accomplish them
 Steps:
1. Segment the market according to the product group,
2. Identify the product requirements, demand patterns & profit
margins of each group,
3. Determine the order winners & order qualifiers for each group
4. Convert order winners into specific performance requirements
 Developing Service Strategy
Most of the procedures are alike with the manufacturing:
• Tools to win the competition
1. Place less emphasis on short-term financial payoffs &
invest more in R&D
2. Invest in people & equipment to improve capability
3. Work on communication barriers within the organization
& develop a sense of common interest
4. Treat labor as a resource to be nurtured, not just a cost to
avoided,
5. Emphasis on process innovations rather than product
innovation
 Global Strategy
• What is “globalization”? …..
• Is it a curse or a blessing to/for us? …..
• The diverse effect of “globalization”
• What works in one country may not work in another
• Strategies must be changed to account for these
differences
• Other issues
– Political, social, cultural, and economic differences
– Organizational politics, organization structure,
system, market structure …
 Reasons to Globalize
Reasons to globalize
1. Reduce costs (labor, taxes, tariffs,
Tangible etc.)
Reasons
2. Improve supply chain
3. Provide better goods and services
Intangible 4. Understand markets
Reasons
5. Learn to improve operations-
experience
6. Attract and retain global talent
 Final word on strategy
• “People don’t want quarter-inch drills, they
want quarter-inch holes” Theodore Levitt
( in his article on Marketing Myopia)
• “A satisfied customer is the best business
strategy of all” Mechael Leboef
THANK YOU !