MANAGEMENT SYSTEMS

O P E R AT I O N S S T R AT EGY

COURSE INSTRUCTOR- ATANU CHAUDHURI

AGENDA– Competitive Priorities of Companies– Operations Performance Objectives– Trade-offs and Performance Frontiers– How is an Operations Strategy developed?

Lets have a discussion• What is the difference between Operations and

Operational?• What is the main objective of strategy

development?• Where do capabilities get created?• How is Operations related to Strategy?

Strategies for Competitive Advantage

Differentiation – better, or at least different Cost leadership – cheaper Response – rapid response

Operations Performance Objectives

• Quality• Speed• Dependability• Flexibility• Cost Efficiency

Meaning of quality for different organizations

• Patients receive appropriate treatment

• Treatments are carried out in correct manner

• Patients are kept informed• Staff are courteous and

helpful

• All parts/assemblies made to specification

• Product is reliable• Product is attractive and

without blemishes/dents

Hospital Automobile Plant

Bus tour operator Super market

? ?

Meaning of speed for different organizations

• Time between requiring treatment and receiving treatment kept to minimum

• Time for test results to be returned kept at minimum

• Time from surgery to discharge kept at minimum

• Time taken for a customer to complete the transactions and billing kept to a minimum

• On-time availability of goods

Hospital Automobile Plant

Bus tour operator

Super market

?

?

Meaning of dependability for different organizations

• On-time delivery of vehicles to dealers

• On-time delivery of spares to service centres

Following published timetable at all timesEnsuring availability of seats to all booked passengers

Hospital Automobile Plant

Bus tour operatorSuper market

?

?

Meaning of flexibility for different organizations

• Mix- wide range of products/options

• Volume- ability to adjust production volumes

• Delivery- ability to reschedule manufacturing priorities

Mix- large number of locations servedVolume- ability to adjust frequency of servicesDelivery- ability to reschedule trips as needed

Hospital Automobile Plant

Bus tour operator

Super market

?

?

Meaning of cost efficiency for different organizations

• Technology and facility costs

• Staff costs• Purchased materials and

services costs

Hospital Automobile Plant

Bus tour operatorSuper market

?

Proportion of the above costs vary by industry

Internal and external benefits of excelling at each performance objective

Potential internal benefits Performance objective Potential external benefits

Quality

Speed

Dependability

Flexibility

Cost

Internal and external benefits of excelling at each performance objective

Potential internal benefits Performance objective Potential external benefits

• Error free processes• More internal reliability• Lower processing costs

Quality • Error free products and services

• Reliable products and services

• Faster throughput times• Less inventory• Lower processing costs

Speed • Short delivery times• Fast response to requests

• Fewer contingencies needed• More internal stability• Lower processing costs

Dependability • On-time delivery of products and services

• Knowledge of delivery times

• Better response to unpredicted events

Flexibility • Frequent launch of new products and services

• Wide range of products and services

• Easier Volume adjustments • Easier delivery adjustments

• Productive processes• Higher margins

Cost • Low prices

Which Dimensions Should Be the Focus?

Order winners: Criteria that differentiates one firm from another.

Examples: low cost (RyanAir), service quality (Narayana Hrudayalaya hospital, India), Flexibility (Dell)

Order qualifier: Criterion that permits the firm’s products/services to even be considered for purchase.

Example: basic quality necessary to be considered a good car

Order Winners and Qualifiers• Order winners

– Performance objectives which directly and significantly contribute to winning businesses from customers

– Considered by customers as key reasons for purchasing a product or service

• Qualifiers– Important but are not major competitive determinants– Must be at some “threshold” level to be considered by the

customer– Further improvement beyond “threshold level” unlikely to

result in competitive benefit

What are the order winners and order qualifiers for a AAU Masters student which a recruiter looks for?

All the performance objectives are important…

why not try to excel along every one?

Competitive Dimensions and Trade-offs

Trade-offs

Trade-offs: Decisions that arise because of the inability of processes to excel simultaneously across all competitive dimensions.

Birth of Operations strategy•

• Skinner (1969) outlined the process of linking corporate strategy to manufacturing strategy• Maximizing operational effectiveness requires recognizing the trade-offs in designing and operating a production system

The notion of a focused factory • Based on a study of 50 plants across 6

industries (Skinner, 1974)• A factory cannot perform well on every

yardstick• A factory serving different markets with

different competitive strategies should be organized as separate plants within a plant -‘focused’ factories, one for standardized products and the other for customized products

Focus

• Performance Objective Focus• Product/service specification focus• Geographic focus• Variety focus• Volume focus• Process requirement focus

How are these images related to trade-offs and performance frontiers?

Remember, all companies or all business units of a company do not face these trade-offsHence, it is actually possible for some companies/ some individuals to improve on multiple dimensions simultaneously

Cost

Flexibility

Delivery

Capabilities get built over a period of time• Sand cone model of capability

accumulation: Empirical evidence

suggests that competitive

capabilities accumulate in an

orderly fashion from quality to

delivery to flexibility to cost

20

Quality

Integrating trade-off and sand cone models • Performance frontier: Maximum performance that can be achieved given a set of operating

choices

•Where an organization is positioned relative to their performance frontiers determines whether

the trade-off model or sand cone model holds

•Trade-offs among capabilities are likely to occur when companies are operating near their

performance frontier

21

Innovation cycles

Responsiveness

Cost Performance frontiersInnovation cycle 1

Innovation cycle 2

Quality

Delivery

Flexibility Cost

Quality

Delivery

Flexibility Cost

Theory of Competitive Progression

Reaching the performance frontier is similar to reaching the end of an innovation cycle

LH

H

L

L = Low, H = High

Group Exercise 2.1

• Identify performance measures for quality, speed, dependability, flexibility and cost for the companies you have been working on, indicate their relative importance and decide which are the order winners and qualifiers with justifications

Operations Resources

Market Requirements

OPERATIONS STRATEGY

Strategic Reconciliation

Operations strategy reconciles the requirements of the market with the capabilities of operations resources

Operations strategy is …..“… the decisions which shape the long-term capabilities of the company’s operations and their contribution to overall strategy through the on-going reconciliation of market requirements and

operations resources …”

Microlevel of the process

Macrolevel of the total operation

Level of analysis

Time scale

Short-termfor example, capacity

decisions

1-12 months

Dem

and

1-10 years

Dem

and

Long-termfor example, capacity

decisions

Level of aggregation

DetailedFor example“What operational capabilities do

we need to cater to the rural market in India?”

AggregatedFor example

“What is our overall capabilities in emerging markets with respect to

competitors?”

Level of abstraction

ConcreteFor example

“How do we improve our purchasing procedures?”

AbstractFor example

“Should we develop strategic alliances with suppliers?”

Tactical Operations Operations strategy

Corporate strategy

Business strategy

Emergent sense of what the strategy should be

Operational experience

Operations strategy

Top-down and bottom-up perspectives of strategy

Preconditions for developing Operations Strategy

Strengths and weaknesses of competitors and possible new entrants into the market

Current and prospective environmental, technological, legal, and economic issues

The product life cycle Resources available within the firm

One must understand:

Developing an Operations Strategy1. Segment the market according to the product group.

Example: need based segmentation

2. Identify (a) product requirements, (b) demand patterns, Example: seasonal, low demand

3. Determine the order winners and order qualifiers. Example: delivery speed (winner), cost (qualifier)

4. Convert order winners into specific performance requirements. Example: Must sell at or below 1000 DKK

Developing an Operations Strategy

The next step is to analyze at the process level…

1. Define the complexity and volume of your product/service.

2. Define whether you offer few specific products/services or highly customized products/services.

3. Finalize product design, process design, supply chain design, supplier relations, capacity management plan & technology choice

Operations’ Role in Corporate Strategy

• Operations provides support for a differentiated strategy

• Operations serves as a firm’s distinctive competence in executing strategies better than competitors

Performance Objectives

Market Positioning

Customer Needs

Competitors’ Actions

The market perspective on operations strategy

Required performance

Understanding markets

PERFORMANCE OBJECTIVES•Wide variety•Product mix flexibility•Speed to market

MARKET POSITION

•Innovative designs•Time to market•Product range •Coordinated launches

Differentiation on:

CUSTOMERS Segmentation on:•Age - youth•Purpose - general

COMPETITORS Traditionally weak in:

The market perspective analysis of a garment company

•promotion•design innovation•responsiveness

•Customer needs

Operations Strategy Decision

Areas

The operations resource perspective on operations strategy

Tangible and Intangible Resources

Operations Capabilities

Operations Processes

Understanding resources and

processes

Strategic decisions

Resources

The operations resource perspective analysis of a theatre lighting company

Tangible•Equipment•Staff

Intangible•Reputation•Relationships

(internal and external)•Experience

•Application of leading-edge lighting technology

•Articulation of client requirements

•Service and installation

Capabilities

• Integration of equipment supply and client

requirements•Design process•Supplier liaison process

Processes

•Location

•Virtual reality technology •Supplier development•Equipment tracking system•Organizational structure

Operations Strategy Decisions

Operations strategy is the strategic reconciliation of market requirements with operations resources

Performance Objectives

Market Positioning

Customer Needs

Competitors’ Actions

Required performance

Understanding markets

Operations Strategy Decision

Areas

Tangible and Intangible Resources

Operations Capabilities

Operations Processes

Understanding resources and

processes

Strategic decisions

Operations has to cope with the clash between the nature of external markets and the nature of internal resources

Operations Resources are….

Difficult to change

Technically constrained

Complex

Market Requirements are….

Dynamic

Heterogeneous

Ambiguous

Operations Strategy Decision Areas

• Capacity Strategy• Supply Network Strategy• Process Technology Strategy• Development and Organization

Operations Strategy Matrix

Source: Operations Strategy by Slack and Lewis, 3rd edition

Discussion on Seven-Eleven Japan

Group Exercise 2.2

• Conduct market requirements and operations resources analysis for the companies you have worked on in session 1

Evolution of Positioning Strategies

• The characteristics of production systems tend to evolve as products move through their product life cycles.

• Operations strategies must include plan for modifying production systems to a changing set of competitive priorities as products mature.

• The capital and production technology required to support these changes must be provided.

Product Life Cycle

Product design and development criticalProduct and process design Short production runsHigh production costsLimited modelsAttention to quality

Introduction Growth Maturity DeclineO

M S

trat

egy/

Issu

es

Forecasting criticalProduct and process reliabilityCompetitive product improvements and optionsIncrease capacityEnhance distribution

StandardizationLess rapid product changes – more minor changesOptimum capacityIncreasing stability of process

Long production runsProduct improvement and cost cutting

Little product differentiationCost minimizationOvercapacity in the industryPrune line to eliminate items not returning good margin

Reduce capacity

THANKS