OPERATIONS STRATEGY

Chapter 2

Outline

1. Operations Strategy Model

2. Emphasis on Operations Objectives

3. Linking Strategies

4. Operations Competence

5. Global Scope of Operations

Operations Strategy

Operation Strategy is concerned with the Operation Strategy is concerned with the development of long term plan for determining development of long term plan for determining how to best utilize the major resources of the how to best utilize the major resources of the firm so that there is high degree of compatibility firm so that there is high degree of compatibility between these resources and firm’s long term between these resources and firm’s long term goal. goal.

Operations Strategy Model (Figure 2.1)

Consistent pattern of decisions

Internalanalysis

Externalanalysis

Mission

DistinctiveCompetence

Objectives(cost, quality, flexibility, delivery)

Policies(process, quality systems, capacity,

and inventory)

Operations Strategy

Business strategy

Functional strategies inmarketing, finance,engineering, human

resources, andinformation systems

Results

Corporate strategy

Corporate Strategy

Defines what business the company is in.

Business Strategy

How the a particular business will compete.

Business Strategies

Cost Leadership Low cost item

Differentiation New Development

External Analysis

External environment includes Competition (Global Competition) Customer (Changing attitude of customers) Economics (Inflation rates, currency fluctuations) Social Conditions (Social awareness, Changing

demands of workforce labours not servants)

PEST Analysis

Internal Environment

Internal Environment includes Availability of Resources Skills and ability of workforce Location (Place) Control Systems

SWOT Analysis

Operation Mission

What we want to do Defines the purpose of operation function with

respect to business and corporate strategies Giving the priority among the operation

objectives Cost Quality Delivery Flexibility

Distinctive Competence

Something an organization does better than any

competing organization that adds value for the

customer.

Distinctiveness Competence

Leads to Competitive Advantage Not easily to intimate (Copy) Requires operations to concentrate on what it

must do

Distinctiveness Can be Skilled Workers Cheap labour

Operations Strategic Objectives

Results that operation is expected to achieve in short or long term goal

Quality-Customer Satisfaction Measurement Flexibility

New Product Development Time to make large number of products

Delivery-when and where the customer need the product or service Time Reliability

Cost efficiency Lower cost products

How does a firm use them to gain a competitive advantage

Operations Policies How the objectives of the operation achieved. Operation Policy should be developed for each of the five

decision categories Quality Process Capacity Inventory Work Force

Policy can emphasis on Highly skilled work force Develop a superior control system

Examples of Important Policies in Operations (Table 2.2)Policy Type Policy Area Strategic Choices

Process Span of process Automation Process flow Job specialization Supervision

Make or buy Handmade or machine–made Flexible or specialized Project, batch, line, or continuous Centralized or empowered workers

Quality Systems

Approach Training Suppliers

Prevention or inspection Technical or managerial training Selected on quality or cost

Capacity Facility size Location Investment

One large or several small facilities Near markets, labor, or materials Permanent or temporary

Inventory Amount Distribution Control Systems

High or low levels of inventory Centralized or decentralized warehouses Control in great detail or less detail

Policy types = decisions in Chapter 1.

Linking Operations to Business Strategies

Business strategy alternatives Product imitator

Operations must focus on keeping costs low. (generic drugs, general products)

Product innovator Operations must maintain flexibility in processes,

labor and suppliers. Order qualifiers and Winners

Qualifiers: why you consider the product Winners: why you choose the product

Operations Competence

To be sustainable, distinctive competence

must not only be unique, it must be

difficult to imitate or copy.

Examples of Operations Distinctive Competence

Skills of employees Equipment or processes Rapid continuous improvement Well developed partnerships Location Organizational knowledge Proprietary information or control systems

Strategy Formulation

Defining a Primary Task What is the firm in the business of doing.

Example: Amazon-Fastest, Easiest and most Enjoyable Shopping Experience.

Paramount-Business of Communication: Not Making Movies. Core Competence

What does the firm do better than others Order Qualifiers

What qualifies an item to be considered for purchase Order Winners

What wins the order Positioning of the Firm

How will firm compete- Where we will serve

Competitive Priorities

Competing on Cost

Elimination of Waste e.g. Wall Mart, Southwest Airlines

Quality Minimizing defect rates, meet the requirements of

design Flexibility

Is the ability to adjust to changes-high volume of existing, new product development

Speed Fast delivery. e.g. Dell, Wall Mart

Strategic Decisions

Products and Services Process and Technology Capacities and Facilities Human Resource Quality Sourcing Operating Systems

Strategic Decision in Operations

Products and Services

Types of Products and Services

Make To Order -Products and Services are made to Customer’s Specification after an order has been received. E.g. Professional Services, Customized Products or Services .

Make To Stock- Products and Services are made in anticipation of demand. e.g. Books, Fast Consumer Goods.

Assemble To Order -Products and Services add options according to Customer Specification. E.g. Computer Systems, Corporate Training etc.

Process and Technology

Project-One at a time production of a product to Customer order Shipbuilding, Construction Project, New Product Development

etc. Batch-System process many different jobs at the same time in

group or batches. Bakeries, Education, Furniture Making.

Mass Production-Produces large volumes of a standard product for a mass market. PCs, TV, Fast Food.

Continuous Production-Used for very high volume products. Refined oil, Water Plant.

For Services, Professional Service (Doctors, Consulting), Service Shop (Professor Classroom ), Mass Service (Retail Store) , Service Factory (Electricity)

Sourcing

Vertical Integration Is the degree to which a firm produces the parts that go into its products.

Outsourcing

Stages in Integration of Operation Strategy to the Corporate goals Manufacturing Organization

Internally Neutral (Stage 1) Minimizing manufacturing negative potential. Outside experts hired for strategic manufacturing decisions. Manufacturing is kept flexible and reactive.

Externally Neutral (Stage 2) Achieve parity (matching) with competitors. Industry practice is followed. Capital investment for catching up competition.

Internally Supportive (Stage 3) Provide credible support to business strategy. Manufacturing investments are consistent & long term goals are addressed.

Externally Supportive (Stage 4)

Pursue a manufacturing based competitive edge. Long range programs for acquiring capabilities of future (Proactive).

Stage 1:Internally Neutral

At this stage the operations function is attempting to reach a certain minimum standard. It is seen as a hindrance in the delivery of competitive advantage by the other business

functions. Its focus is on avoiding mistakes so it tends to be inward-looking and is reactive. The bad publicity that comes

from organizations

being let down by their operations can be damaging.

Stage 2: External Neutrality

Here the operations function compares its performance with competitor organizations. Benchmarking its performance against its competitors enables it to identify the best ideas

to copy. In trying to match the benchmarks it has identified, the operations function is attempting to be externally

neutral.

Stage 3: Internally supportive

At Stage 3 operations are broadly up there with the best but have aspirations to continue to improve and be the very best

in the market. The operations function has developed appropriate operations processes and resources to excel in

those areas in which the company needs to compete effectively. The internally supportive element comes from the development of a credible operations strategy which

supports the corporate strategy.

Stage 4: Externally supportive

At this level the operations function is playing a lead role in strategy-making and is forming the foundation for future competitive success. It might be doing so by organizing

resources in innovative ways or in designing in flexibility so it is capable of adapting as markets change. At stage 4 a long term perspective is taken and capabilities developed

that will enable the organization to compete in future market conditions. It is about redefining the market and its

expectations.

What is the role of the operations function?

Operations as effector

Operations as follower

Operations as leader

Ops

Strategy

Operationsimplements strategy

Operationssupports strategy

Operationsdrives strategy

Strategy Ops

Strategy

Ops

The 3 key attributes of operations

Operations Contribution

Implementing

Supporting

Driving

be Dependable

Operationalise (to put something to use or into operation) strategy

be Appropriate

Understand strategy

Contribute to decisions

be Innovative

provide Foundation of strategy

Develop long-term Capabilities

The Strategic Role of the Operations Functions

Hayes and Wheelwright’s Four Stage model

1. Internally Neutral2. Externally Neutral3. Internally Supportive4. Externally Supportive

How can the contribution of theoperations function be assessed?

Externally

Objective is to minimize the negative impact of ‘operations’.

Internally

Neutral Supportive

Stage 1

Stage 2 Stage 4

Stage 3

Objective is for ‘operations’ to help the business maintain parity with its competitors.

Objective is for ‘operations’ to provide credible support for the business strategy.

Objective is for ‘operations’ to provide a source of competitive advantage.

Link Strategy With

Operations

Give an Operations Advantage

Externally supportive

Adopt best Practice

Correct the Worst

Problems

Increasing contri

bution of o

peratio

ns

Internally supportive

Externally neutral

Internally neutral

The strategic role of operations can be defined (Hayes and Wheelwright)

STAGE 1 STAGE 2 STAGE 3 STAGE 4

The ability

to Implement

The ability

to Drive strategy

Stop holding the

organisation back

Be as good as

competitors

Be clearly the best in

the industry

Redefine the industry’s

expectations

The abilityto

support Strategy

Issues and Trends in Operations

Global Markets, Global Sourcing, Global Operations Virtual Companies

Business organization collaborates with one another Strategic alliances Organizations Boundaries are hard to define

Emphasis on Service Manufacturing & Service Companies both concentrate on service delivery

Speed and Flexibility Speed of innovation, delivery, communication, information

Supply Chain Managing the supply chain, virtual integration

Issues and Trends in Operations (contd)

C-Commerce When business partners share data, collaborate on design issues,

synchronize activities. Reduce time to market, economies of scale, purchasing cost etc.

Technological Advancements IT, Telecom, e-Commerce etc

Knowledge R&D, Learn from the mistakes, learn outside the organization.

Environment and Social Responsibility Impact on environment, social awareness.

Competitiveness:Competitiveness:

How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services

Businesses Compete Using Marketing

Identifying consumer wants and needs

Pricing Advertising and promotion

Businesses Compete Using Operations

Product and service design Cost Location Quality Quick response

Businesses Compete Using Operations

Flexibility Inventory management Supply chain management Service

Why Some Organizations Fail

Too much emphasis on short-term financial performance

Failing to take advantage of strengths and opportunities

Failing to recognize competitive threats

Neglecting operations strategy

Why Some Organizations Fail Too much emphasis in product and

service design and not enough on improvement

Neglecting investments in capital and human resources

Failing to establish good internal communications

Failing to consider customer wants and needs

Mission/Strategy/Tactics

How does mission, strategies and tactics relate todecision making and distinctive competencies?

StrategyStrategy TacticsTacticsMissionMission

Strategy Strategies

Plans for achieving organizational goals Mission

The reason for existence for an organization Mission Statement

Answers the question “What business are we in?” Goals

Provide detail and scope of mission Tactics

The methods and actions taken to accomplish strategies

Planning and Decision MakingMission

Goals

Organizational Strategies

Functional Goals

Finance Strategies

MarketingStrategies

OperationsStrategies

Tactics Tactics Tactics

Operatingprocedures

Operatingprocedures

Operatingprocedures

Strategy ExampleRita is a high school student. She would like to have a career in business, have a good job, and earn enough income to live comfortably

Mission: Live a good life Goal: Successful career, good income Strategy: Obtain a college Education Tactics: Select a college and a

major Operations: Register, buy books, take courses, study, graduate, get job

Examples of Strategies

Low cost Scale-based strategies Specialization Flexible operations High quality Service

Strategy and Tactics Distinctive Competencies

The special attributes or abilities that give an organization a competitive edge. Price Quality Time Flexibility Service Location

Banks, ATMsConvenienceLocationLocation

DisneylandNordstroms

Superior customer service

ServiceService

Burger KingSupermarkets

VarietyVolume

FlexibilityFlexibility

Express Mail, Fedex,One-hour photo, UPS

Rapid deliveryOn-time delivery

TimeTime

Sony TVLexus, CadillacPepsi, Kodak, Motorola

High-performance design or high quality Consistent quality

QualityQuality

U.S. first-class postageMotel-6, Red Roof Inns

Low CostPricePrice

Examples of Distinctive Competencies

Operations Strategy

Operations strategy – The approach, consistent with organization strategy, that is used to guide the operations function.

Strategy Formulation

Distinctive competencies Environmental scanning SWOT Order qualifiers Order winners

Strategy Formulation

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

End of Chapter Two