OPERATIONS OPERATIONS STRATEGYSTRATEGY

ContentsContents

1- what is strategy ?1- what is strategy ?2- strategy levels2- strategy levels3- What is operations strategy?3- What is operations strategy?4- Competitive priorities.4- Competitive priorities.5- Trade-Offs.5- Trade-Offs.

1- What is 1- What is strategystrategy

What is strategy?What is strategy?

Henry Mintzberg, in his 1994 book, The Rise and Fall of The Rise and Fall of Strategic PlanningStrategic Planning , points out that people use use "strategy" in several different ways,"strategy" in several different ways, the most common being these fourbeing these four:

Strategy is a planplan, a "how," a means of getting from here to there”

Strategy is a patternpattern in actions over time; for example, a company that regularly markets very expensive products is using a "high end" strategy.

Strategy is positionposition; that is, it reflects decisions to offer particular products or services in particular markets.

Strategy is perspectiveperspective, that is, vision and direction.

What is strategy?What is strategy?

1- Strategy is a long term planlong term plan of action designed to achieve a particular goal achieve a particular goal

2- Strategy is approachapproach taken that will affect the overall direction of the organization and will overall direction of the organization and will establish the organization’s future environment.establish the organization’s future environment.

. 3- A strategy is: a planned, deliberate procedure goal-oriented (has an identifiable outcome) achieved with a sequence of steps subject to monitoring and modification

2-Strategy levels2-Strategy levels

strategy levelsstrategy levels

company strategy can be formulated and implemented at three different levels:

Corporate level Business unit level Functional or departmental level:

Corporate strategyCorporate strategy

Corporate -level strategy is a set of objectives, plans, and policies for the organization to successfully compete in its markets.

- Focus on:-- The kinds of businesseskinds of businesses the firm wants to engage

in - (Specifies business of the company (Specifies business of the company (new products/services)new products/services)- - Ways to acquire or get rid of acquire or get rid of

businesses,businesses, - - Allocation of resources among Allocation of resources among

businessesbusinesses,

- - Ways to manage the businessesWays to manage the businesses Long range (3 to 5 years) Focuses on few key areas

2- Business –level strategy2- Business –level strategy

- Once top management agrees on corporate -level strategy, they can turn their attention to the business –level strategy….

- business –level strategy is the strategy that guides the operations of a single business, outlining how it will outlining how it will compete.compete. ( Defines the long-range plan to compete in the Defines the long-range plan to compete in the marketplace+ Helps to differentiate the firm from competitors)marketplace+ Helps to differentiate the firm from competitors) It answers the question of “how do we compete” Involve:

(A)- How the firm can (A)- How the firm can maintain a competitive maintain a competitive advantageadvantage??

(B)- How each key functional department (production, human (B)- How each key functional department (production, human resources, marketing, and finance) can resources, marketing, and finance) can contribute to the contribute to the overall effectiveness?overall effectiveness?

(C)- How (C)- How resources should be allocatedresources should be allocated among these among these functions?functions?

3- Functional -level strategy3- Functional -level strategy

functional strategy is a set of decisionsa set of decisions that marketing, finance, operations, and other departments develop to support the particular develop to support the particular business strategy. business strategy.

Functional strategy consists of guidelines for

managing a firm’s functional areas, such as marketing, human resources, engineering, R&D.

Each functional strategy should be design to contribute to the business –level strategy.

Strategy processStrategy process

MarketingDecisions

OperationsDecisions

Fin./Acct.Decisions

CorporateStrategy

BusinessStrategy

Functional AreaFunctional AreaStrategies

Service-enhanced

Product orDelivered Service

Policy

Satisfied Customer

Corporate Strategy

Focus: Survival

Business StrategyFocus: Distinctive Competence

Cost LeadershipProduct Differentiation

Focus (cost or differentiation)

Operations Strategy

Focus: Competitive PrioritiesCost Flexibility Quality Delivery

ImplementationCapability Building

ResourcesProcess Product

Structure Infrastructure

Other FunctionalStrategies

MarketingFinanceHuman ResourcesEngineeringInformation Systems

3- What is operations 3- What is operations strategy?strategy?

2 - What is operations 2 - What is operations strategy?strategy?

1-1- The plan that specifies the design and use of resources to support the business strategy..

The operations strategy must be The operations strategy must be aligned with the company’s aligned with the company’s business strategybusiness strategy and enable the company to achieve its long- and enable the company to achieve its long-term planterm plan

2-2- The means by which operations by which operations implements the firm’s corporate strategy and helps to build a customer-driven firm. and helps to build a customer-driven firm.

It links long-term and short-term operations It links long-term and short-term operations decisions to corporate strategy.decisions to corporate strategy.

33- A long-range plan for the production of a company’s products/services, - A long-range plan for the production of a company’s products/services, and provides a road map for the production function in helping to and provides a road map for the production function in helping to achieve the business strategy.achieve the business strategy.

4-Competitive priorities4-Competitive priorities

What are competitive priorities ?What are competitive priorities ?

1- Competitive priorities are 1- Competitive priorities are approachesapproaches through which through which operations operations functionfunction provides a firm with a specific provides a firm with a specific competitive advantage.competitive advantage.

2- Competitive advantage is an 2- Competitive advantage is an advantage over competitors gained advantage over competitors gained by offering consumers greater value, either by means of by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that lower prices or by providing greater benefits and service that justifies higher pricesjustifies higher prices

The key to developing an effective operations strategy lies in The key to developing an effective operations strategy lies in understanding how to create or add value for customers.understanding how to create or add value for customers.

Specifically, value is added through the competitive priority or prioritiesvalue is added through the competitive priority or priorities that are selected that are selected to support a given strategyto support a given strategy.

Skinner and others initially identified four basic competitive priorities. These were cost, quality, delivery, and flexibilitycost, quality, delivery, and flexibility.

In the 1990s companies began to differentiate themselves with a fifth competitive priority-serviceservice.

Competitive prioritiespriorities

Type Priority

Low Cost Providing low cost products. Controlling costs across the board.

Quality Providing high quality products. Focus is on product and process quality.

Delivery Providing products reliably and quickly.

Flexibility Providing a wide variety of products (mass customization). How fast a firm can produce a new product line.

Service Providing “value-added” service. How products are delivered and supported.

Compete on cost ? ( 1 Compete on cost ? ( 1 of 3)of 3)

Within every industry, there is usually a segment of the market Within every industry, there is usually a segment of the market that buys strictly on the basis of price. that buys strictly on the basis of price.

To profitably compete in this niche, a firm must necessarily, therefore, be the low cost producer. But even doing this doesn't But even doing this doesn't success. always guarantee success. always guarantee ……..why?why?

This segment of the market is frequently very large,very large, and many companies are lured by the potential for the significant profits that are associated with large unit volumes of product.

As a consequence, the competition in this segment is competition in this segment is exceedingly fierce-and so is the failure rate.exceedingly fierce-and so is the failure rate.

After all, there can only be one low-cost there can only be one low-cost producer, and that firm usually establishes producer, and that firm usually establishes the selling price in the marketthe selling price in the market

Compete on cost ?(2 of Compete on cost ?(2 of 3 )3 )

Competing based on cost means offering a product at a low product at a low price relative to the prices of competitorsprice relative to the prices of competitors.

The need for this type of competition emerges from the business strategy.

The role of the operations strategy is to develop a plan The role of the operations strategy is to develop a plan for the use of resources to support this type of for the use of resources to support this type of competition.competition.

Note that a low-cost strategy can result in a higher profit margin, even at a competitive price. Also, low cost does not imply low cost does not imply low quality.low quality.

Let’s look at some specific characteristicssome specific characteristics of the operations function we might find in a company competing on cost.

To develop this competitive priority, the operations function must focus primarily on cutting costs in the system:

Compete on cost ?(3 of Compete on cost ?(3 of 3)3) Such as costs of labor, materials, and facilities. Such as costs of labor, materials, and facilities.

Companies that compete based on cost study their operations system carefully Companies that compete based on cost study their operations system carefully toto eliminate all waste. eliminate all waste.

They might offer They might offer extra trainingextra training to employees to maximize their to employees to maximize their productivity productivity minimize scrapminimize scrap. Also, they might Also, they might invest in invest in automationautomation in order to increase productivity in order to increase productivity. Generally, companies that compete based on cost offer a narrow range of offer a narrow range of

products and product features, products and product features, allow for little customization, allow for little customization, and have an operations process that is designed to be as efficient as and have an operations process that is designed to be as efficient as

possible .possible . In the U.S., low cost tended to be the primary objective of manufacturing firms

from the 1950s to the mid 1970s. Cost measures includeCost measures include :- dollars per unit, inventory turns, and labor hours per unit. dollars per unit, inventory turns, and labor hours per unit.

Compete on Compete on quality quality ?(1 ?(1 of 3)of 3)

Many companies claim that Many companies claim that quality quality is their top priority, and is their top priority, and many customers say that they look for quality in the products many customers say that they look for quality in the products they buy. they buy.

Yet quality has a subjective meaning; it depends on who is defining itYet quality has a subjective meaning; it depends on who is defining it. .

For example, to one person quality could mean that the For example, to one person quality could mean that the product product lasts a long timelasts a long time, such as with a Volvo, a car known for its , such as with a Volvo, a car known for its longevity. longevity.

To another person quality might mean To another person quality might mean high performancehigh performance, such as , such as a BMW. a BMW.

When companies focus on quality as a competitive priority, they are When companies focus on quality as a competitive priority, they are focusing on the focusing on the dimensions of quality that are considered dimensions of quality that are considered important by their customers.important by their customers.

Compete on Compete on quality quality ?(2 ?(2 of 3)of 3)

Quality as a competitive priority Quality as a competitive priority has two dimensionshas two dimensions. . high-high-

performance designperformance design++ goods and services consistency goods and services consistency (1)- high-performance design(1)- high-performance design:- :- This means that the operations This means that the operations function will be designed to focus on function will be designed to focus on

aspects of qualityaspects of quality such as superior features, close tolerances, high such as superior features, close tolerances, high durability, and excellent customer servicedurability, and excellent customer service. .

(2) goods and services consistency:-(2) goods and services consistency:- The second dimensionThe second dimension is goods and services consistency, is goods and services consistency,

which measures which measures how often the goods or services meet the exact how often the goods or services meet the exact design specificationsdesign specifications. – . – to get the same product every time at any to get the same product every time at any location.location.

Companies that compete on quality must deliver not only Companies that compete on quality must deliver not only high-performance design but goods and services consistency high-performance design but goods and services consistency as well.as well.

Compete on Compete on quality quality ?(3 ?(3 of 3)of 3)

A company that competes on this dimension A company that competes on this dimension needs to implement needs to implement quality in every area of the organization. quality in every area of the organization.

One of the One of the firstfirst aspects that needs to be addressed is aspects that needs to be addressed is product product design qualitydesign quality, , which involves which involves making sure the product meets the making sure the product meets the requirements of the customerrequirements of the customer..

A second aspectA second aspect is is process qualityprocess quality, which deals with designing , which deals with designing a process to produce error-free productsa process to produce error-free products. .

This includes focusing on equipment, workers, materials, and every other This includes focusing on equipment, workers, materials, and every other aspect of the operation to make sure it works the way it is supposed to. aspect of the operation to make sure it works the way it is supposed to. Companies that compete based on quality have to address both of these Companies that compete based on quality have to address both of these issues: the product must be designed to meet customer needs, and the issues: the product must be designed to meet customer needs, and the process must produce the product exactly as it is designedprocess must produce the product exactly as it is designed ..

Quality measures include :Quality measures include : parts per million defective, percent returns, results from satisfaction parts per million defective, percent returns, results from satisfaction

surveys, warranty dollars, and so on.surveys, warranty dollars, and so on.

Compete on Compete on flexibility flexibility ?(1 ?(1 of 3)of 3)

Flexibility has three dimensions:-volume, new product, Flexibility has three dimensions:-volume, new product, and product mix/customization. and product mix/customization.

(1)-Volume flexibility: --Volume flexibility is related to Volume flexibility is related to how fast a company can change how fast a company can change

over its production facilitiesover its production facilities to produce a new line of products. to produce a new line of products. (requires accelerating or decelerating the (requires accelerating or decelerating the rate of production rate of production quickly to handle large fluctuations in demand).quickly to handle large fluctuations in demand).

This dimension is growing in importance as product life cycles become This dimension is growing in importance as product life cycles become shorter and shorter.shorter and shorter.

Volume flexibility also related to the ability to adjust for Volume flexibility also related to the ability to adjust for seasonal seasonal variationsvariations and fluctuations, and is particularly important for fashion and fluctuations, and is particularly important for fashion apparel firms, for example.apparel firms, for example.

Compete on Compete on flexibility flexibility ?(2 ?(2 of 3)of 3)(2)-New product flexibility: -

- The speed, and frequency, with The speed, and frequency, with which new products are brought which new products are brought from concept to market.from concept to market. Automotive firms in recent years Automotive firms in recent years have made great strides in new have made great strides in new product flexibilityproduct flexibility

Compete on Compete on flexibility flexibility ?(3 ?(3 of 3)of 3)

(3)-Product mix/customization flexibility:- Product mix/customization flexibility is Product mix/customization flexibility is the ability of a company the ability of a company

to offer a wide range of productsto offer a wide range of products. . This may simply mean that the catalog contains many items, or it This may simply mean that the catalog contains many items, or it

may mean that the firm has the ability to develop customized may mean that the firm has the ability to develop customized products. products.

Many machine tool companies produce a single product for a Many machine tool companies produce a single product for a given customer, given customer, and then never produce that exact and then never produce that exact product againproduct again..

One element of flexibility is the firm's ability to offer its One element of flexibility is the firm's ability to offer its customers a widecustomers a wide variety of productsvariety of products. .

The greatest flexibility along this dimension is achieved when every product is customized to meet the specific requirements of every individual customer. .

Compete on Compete on deliverydelivery??

Delivery can be defined on two dimensionstwo dimensions: speed & reliability. Speed:-Speed:- Quickly filling a customer’s order is often an important factor in the Quickly filling a customer’s order is often an important factor in the

purchasing decision.purchasing decision. A firm that can provide consistent and fast delivery A firm that can provide consistent and fast delivery can charge a premium price for its can charge a premium price for its

productsproducts For instance, some firms compete on For instance, some firms compete on delivering within 24 hoursdelivering within 24 hours of the customer request of the customer request. Reliability:-Reliability:- In addition to fast delivery, the reliability of the delivery is also

important. In other words, products should be delivered to customers when promised (provided reliably within the quoted delivery time.)

Measures for delivery include Measures for delivery include percent on time, cycle time from

request to receipt, percent stockouts, and so on.

Compete on service?Compete on service?

Service might involve Service might involve after –sales after –sales activities that perceived by customer as activities that perceived by customer as

value-addedvalue-added, such as delivery, setup, , such as delivery, setup, warranty work, technical support, or warranty work, technical support, or extra attention while work is in extra attention while work is in progress, such as courtesy , keeping progress, such as courtesy , keeping the customer informed, and attention the customer informed, and attention to little details.to little details.

5- The Trade-Offs5- The Trade-Offs

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