Operational Strategy

1. © Wiley 2010 1
Chapter 2 - Operations
Strategy and Competitiveness
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010

2. 2
The Role of Operations
Strategy
 Provide a plan that makes best use of
resources which;
 Specifies the policies and plans for using
organizational resources
 Supports Business Strategy as shown on
next slide
© Wiley 2010

3. 3
Business/Functional Strategy
© Wiley 2010

4. Background: Business Strategy
© Wiley 2010 4
http://www.youtube.com/watch?v=mYF2_FBCvXw
http://www.youtube.com/watch?v=ehMAwIHGN0Y

5. © Wiley 2010 5
Importance of Operations
Strategy
 Companies often do not understand the
differences between operational
efficiency and strategy
 Operational efficiency is performing tasks
well, even better than competitors
 Strategy is a plan for competing in the
marketplace
 Operations strategy is to ensure all
tasks performed are the right tasks

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Developing a Business
Strategy
 A business strategy is developed after
taking into many factors and following
some strategic decisions such as;
 What business is the company in (mission)
 Analyzing and understanding the market
(environmental scanning)
 Identifying the companies strengths (core
competencies)

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Three Inputs to a Business Strategy

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Examples from Strategies
 Mission: Dell Computer- “to be the most
successful computer company in the world”
 Environmental Scanning: political trends,
social trends, economic trends, market place
trends, global trends
 Core Competencies: strength of workers,
modern facilities, market understanding, best
technologies, financial know-how, logistics

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Example: Nokia
Nokia extended its already formidable dominance of the global
handset business on Jan. 24, announcing it had achieved 40%
market share in the fourth quarter of 2007. But perhaps the biggest
surprise was that the Finnish company achieved this long-promised
and psychologically important milestone while also becoming more
profitable.
http://www.businessweek.com/globalbiz/content/jan2008/gb20080124_974301.htm?chan=search

10. © Wiley 2010 10
Developing an Operations
Strategy
 Operations Strategy is a plan for the
design and management of operations
functions
 Operation Strategy developed after the
business strategy
 Operations Strategy focuses on specific
capabilities which give it a competitive
edge – competitive priorities

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Operations Strategy – Designing
the Operations Function

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Competitive Priorities- The Edge
 Four Important Operations Questions:
Will you compete on –
Cost?
Quality?
Time?
Flexibility?
 All of the above? Some? Tradeoffs?

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Competing on Cost?
 Offering product at a low price relative to competition
 Typically high volume products
 Often limit product range & offer little
customization
 May invest in automation to reduce unit costs
 Can use lower skill labor
 Probably use product focused layouts
 Low cost does not mean low quality

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Competing on Quality?
 Quality is often subjective
 Quality is defined differently depending on who is
defining it
 Two major quality dimensions include
 High performance design:

Superior features, high durability, & excellent customer service
 Product & service consistency:

Meets design specifications

Close tolerances

Error free delivery
 Quality needs to address
 Product design quality – product/service meets requirements
 Process quality – error free products

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Competing on Time?
 Time/speed one of most important
competition priorities
 First that can deliver often wins the race
 Time related issues involve
 Rapid delivery:

Focused on shorter time between order placement and delivery
 On-time delivery:

Deliver product exactly when needed every time

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Competing on Flexibility?
 Company environment changes rapidly
 Company must accommodate change by
being flexible
 Product flexibility:

Easily switch production from one item to another

Easily customize product/service to meet specific requirements
of a customer
 Volume flexibility:

Ability to ramp production up and down to match market
demands

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The Need for Trade-offs
 Decisions must emphasis priorities that support business
strategy
 Decisions often required trade offs
 Decisions must focus on order qualifiers and order winners
 Which priorities are “Order Qualifiers”?
e.g. Must have excellent quality since everyone expects
it
 Which priorities are “Order Winners”?
e.g. Southwest Airlines competes on cost
McDonald’s competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility

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Competitive Priorities front & center
 http://www.businessweek.com/magazin
e/content/06_13/b3977009.htm
 http://www.businessweek.com/magazin
e/content/06_13/b3977010.htm?
chan=search
 http://www.businessweek.com/technolo
gy/content/dec2007/tc20071228_10685
7.htm?chan=search

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Translating to Production Requirements
 Specific Operation requirements
include two general categories
 Structure – decisions related to the
production process, such as characteristics
of facilities used, selection of appropriate
technology, and the flow of goods and
services
 Infrastructure – decisions related to
planning and control systems of operations

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Translating to Production Requirements
 Dell Computer example – structure &
infrastructure

They focus on customer service, cost, and speed
 ERP system developed to allow customers to
order directly from Dell
 Product design and assembly line allow a “make
to order” strategy – lowers costs, increases turns
 Suppliers ship components to a warehouse within
15 minutes of the assembly plant - VMI
 Dell set up a shipping arrangement with UPS

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Strategic Role of Technology
 Technology should support competitive
priorities
 Three Applications: product technology, process
technology, and information technology
 Products - Teflon, CD’s, fiber optic cable
 Processes – flexible automation, CAD
 Information Technology – POS, EDI, ERP,
B2B

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Technology for Competitive
Advantage
 Technology has positive and negative
potentials
 Positive

Improve processes

Maintain up-to-date standards

Obtain competitive advantage
 Negative

Costly

Promotes dependency

Risks such as overstating benefits

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Technology for Competitive
Advantage
 Technology should
 Support competitive priorities
 Can require change to strategic plans
 Can require change to operations strategy
 Technology is an important strategic
decision

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Measuring Productivity
 Productivity is a measure of how efficiently inputs are
converted to outputs
Productivity = output/input
 Total Productivity Measure:
Total Productivity = (total output)/(total of all
inputs)
 Partial Productivity Measure:
Partial Productivity = (total output)/(single input)
 Multifactor Productivity Measure:
Multi-factor Productivity = (total output)/(several inputs)

25. © Wiley 2010 25
Total Productivity: example
Bluegill Furniture makes kitchen chairs. The weekly
dollar value of its output, including finished goods and
work-in-progress, is $14,280. The value of inputs
(labor, materials, capital) is approximately $16,528.
What is the total productivity measure for Bluegill?
Total productivity = output/input
= $14,280/$16,528 = .864 or 86.4%

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Partial Productivity: example
Bluegill Furniture has hired 2 new workers to paint
chairs. Together they have painted 10 chairs in 4
hours. What is labor productivity for the pair?
Labor productivity = output/labor
= (10 chairs)/(2 x 4 hr)
= (10 chairs)/(8 hr) or 1.25 chairs/hr

27. © Wiley 2010 27
Multifactor Productivity: example
Bluegill Furniture averages 35 chairs/day. Labor costs
average $480, material costs are typically $200, and
overhead cost is $250. Bluegill sells the chairs to a
retailer for $70/unit. Find multifactor productivity.
Multifactor productivity =
(value of output)/(labor + material + overhead costs)
= ($70/chair x 35 chairs)/(480+200+250)
= ($2450)/($930) or 2.63

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Interpreting Productivity Measures
 Productivity measures must be compared to
something, i.e. another year, a different
company
 Raw productivity calculations do not tell the
complete story unless there are no major
structure differences.

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Interpreting Productivity Measures
 Other productivity measure questions;
 Is this partial productivity measurement
enough to make an investment decision?
 Should you also look at productivity measures
for the two major competitors for comparison?
 Productivity measure provides information
on how the firm is doing relative to what is
critical to the firm

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Productivity, Competitiveness, and
the Service Sector
 Productivity is a scorecard
on effective resource use
 A nation’s Productivity
effects its standard of living
 US productivity growth
averaged 2.8% from
1948-1973
 Productivity growth slowed
for the next 25 years to
1.1%
 Productivity growth in
service industries has been
less than in manufacturing

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Productivity and the Service
Sector
 Measuring service sector productivity is
a unique challenge
 Traditional measures focus on tangible
outcomes
 Service industries primarily produce
intangible outcomes
 Measuring intangibles is challenging

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Operations Strategy Across
the Organization
 Business strategy defines long-term
plan
 Operations strategy support the
business strategy
 Marketing strategy needs to fully
understand operations capability
 Financial plans in effect support
operations activities.

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Review of Learning Objectives
 Define the role of Business Strategy
 Explain how a Business strategy is developed
 Explain the role of Operations Strategy in
the organization
 Explain the relationship between business
strategy and operations strategy
 Describe how an operations strategy is
developed

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Review of Learning Objectives
 Identify competitive priorities for of the
operations function
 Explain the strategic role of technology
 Define productivity and identify
productivity measures
 Compute productivity measures

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Chapter 2 Highlights
 Business Strategy is a long range plan and vision. Each
individual business function develop needs to support
the business strategy
 An organization develops its business strategy by doing
environmental scanning and considering its mission
and its core competencies.
 The role of operations strategy is to provide a long-
range plan for the use of the company’s resources in
producing the company’s primary goods and services.
 The role of business strategy is to serve as an overall
guide for the development of the organization’s
operations strategy.

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Chapter 2 Highlights
 The operations strategy focuses on developing specific
capabilities called competitive priorities.
 There are four categories of competitive priorities: cost,
quality, time, and flexibility
 Technology can be sued by companies to gain a
competitive advantage and should be acquired to support
the company’s chosen competitive priorities
 Productivity is a measure that indicates how efficiently an
organization is using its resources
 Productivity is computed as the ratio or organizational
outputs divided by inputs

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Example: Detroit Edison
DTE's journey into the distributed-energy business began in 1994
when CEO Anthony Earley took over Detroit Edison. Convinced that
the utility industry was on an eventual collision course with customer
needs…Distributed generation soon became a strategic goal of the
company.
The idea behind distributed generation is that a school, hospital, or
office complex can produce its own power just as cheaply as it can
buy it from the grid. When rates go up, it can produce extra energy
and sell it back to the grid. When rates go lower, it can shut down its
generator and buy the cheaper electricity from the utility. This
approach allows customers to get slightly cheaper electricity from a
more stable source that won't suffer interruptions (which is especially
important to computer-intensive companies) and can flexibly meet
changing demands.
http://www.businessweek.com/bwdaily/dnflash/jul2001/nf2001072_224.htm?chan=search

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Example: Nestle
Brabeck's other strategic goal is transforming Nestle from a set of far-
flung operations into a single global machine. He has inked a $200
million deal with SAP to link its five e-mail systems and permit
Nestle's headquarters in Vevey, Switzerland, to know for the first time
how many raw materials its subsidiaries buy, in total, from around the
world. The company then will be able to negotiate better contracts
with suppliers and centralize production. Last year alone, Brabeck
closed 38 different factories. All told, he has slashed $1.6 billion in
costs, without labor strife.
http://www.businessweek.com/magazine/content/01_24/b3736644.htm?chan=search