Chapter 2: Operations Strategy and Management

2.1 Strategic Positioning and Operational Effectiveness

 Strategy – Derives from the Greek military term ‘strategia’ – ‘the general art.’ A plan to achieve an objective.
o Plan: Specifies precisely what managers must do to reach corporate objectives
o Implicit Objective of a Business Strategy: Deliver sustained superior performance relative to the competition
 Competitive Product Space – A representation of the firm’s product portfolio as measured along the four dimensions or product
attributes (cost, time, variety, and quality).
o Strategic Positioning – Defines those positions that the firm wants to occupy in its competitive product space. It identifies
the product attributes that the firm wants to provide to its customers. To stay competitive, a firm must ensure its
competition finds it difficult to imitate its chosen position
 Operational Effectiveness – possessing process competencies that support the given strategic position.
o Includes but is not limited to efficiency
o Any number of practices that allow a company to better utilize its inputs, does not necessarily mean lowest-cost process
(operational efficiency)
o Developing process competencies requires designing suitable business processes and operating policies.
 Sustaining a competitive advantage requires a firm to have a good strategic position and operational effectiveness to support that
position

2.3 The Strategy Hierarchy

 Corporate Strategy – Defines the scope of each division or business unit in terms of the attributes of the products that it will offer
and market segments that it will serve
o Goal: To differentiate the firm from its competition by establishing competitive priorities in terms of the four product
attributes
o Two-Pronged Analysis entailed by a Business Strategy:
 1. Competitive analysis of the industry in which the BU will compete
 2. Critical analysis of the unit’s competitive skills and resources
 Functional Strategies – Define the purpose for marketing, operations, and finance – the three main functions in most organizations
o Marketing: Identifies and targets customers that the BU wants to serve, the products that It must supply to meet
customer needs, and the competition that It will face in the marketplace.
o Operations: Designs, plans, and manages processes through which the BU supplies customers with desired products
 Operations Strategy: Configures and develops business processes that best enable a firm to produce and
deliver the products by the business strategy
 Includes selecting activities and resources and combining them into a network architecture that
defines the key elements of a process, such as inputs and outputs, flow units, and information
structure.
 Also, responsible for developing/acquiring the necessary process competencies – process cost, flow
time, flexibility, and quality – to support the firm’s business strategy.
 Business strategy choses products in which to compete – Operations strategy focuses on the
process competencies required to produce and deliver those product attributes
o Finance: Acquires and allocates resources needed to operate a unit’s business processes
o The functions must translate the midlevel business strategy into its own functional requirements by specifying what it
must do well to support the higher-level strategy
 Business Strategy – Concerned with selecting external markets and products to supply them
 Operations – Strategy must establish operational objectives that are consistent with overall business goals and develop processes
that will accomplish them
 Strategies and objectives
o Business Strategy: Lowest cost
 Operations Strategy: Efficient and lea business processes, high utilization of assets, and high level of labor
productivity
o Business Strategy: Product variety
 Operations Strategy: Flexible processes to produce and deliver customized products
o Business Strategy: Short response times
 Operations strategy: Greater investment in inventories or greater resource availability through excess capacity
o Business Strategy: Delivering high-quality products
 Operations Strategy: High quality processes with precision equipment and highly trained workers

2.3 Strategic Fit

 Cost Efficiency – Achieving a desired level of outputs with a minimal level of inputs and resources
  Efficient – Operates at a low cost
 Effective – Supports the execution of the company’s strategy
 Key Condition for Process Effectiveness is the existence of a strategic fit among three main components of a firm’s strategy:
o 1. Its Strategic Position
o 2. Its Process Architecture
o 3. Its Managerial Polices
 Strategic Fit – Consistency between the strategic position that a firm seeks and the competencies of its process architecture and
managerial policies
 Market and Process-Driven Strategies: Transforming a company’s key processes into strategic competencies that consistently
provide superior value to the customers
o Market-Driven Strategy: A firm starts with key competitive priorates and then develops process to support them
 Commodity products
o Process-Driven Strategy: A firm starts with a given set of process competencies and then identifies a market position that
is best support by those processes
 Technology innovative products
o Strategic fit requires both market and process driven strategies
 Entails identifying external market opportunities along with developing internal process competencies until
the two are mutually consistent, repeatedly.
 Inextricably links a company’s internal competencies and its external industry environment

2.4 Focused Operations

 Focused Strategy and Focused Process:

o Focused Strategy – Committing to a limited, congruent set of objectives in terms of demand (products and markets) and
supply (inputs, necessary process technologies and volumes). Concentrates on serving limited market segments with
business processes specifically designed and operated to meet their needs.
 Supported by a Focused Processed
o Focused Process – One whose products fall within a small region of the competitive product space
 All products from a focused process have similar attributes
 Area occupied on the produce space by the product portfolio is small
o Plant-within-a-Plant (PWP) – The entire facility is divided into several ‘miniplants’ each devoted to its own specific
mission with a process that focuses strictly on accomplishing that mission
 Improve responsiveness, higher quality, lower cost
 Achieving strategic fit through focused operations provides firms with a powerful deterrent barrier against competitor’s efforts to
imitate them. Greater number of activities involved, the harder the wholesale imitation becomes. Supporting a firm’s strategic
position with multiple, mutually reinforcing activities creates sustainable competitive advantage because it is harder for a rival to
match an array of interlocked activities than to imitate a particular activities.

2.5 Matching Products and Processes

 Product-Process Matrix – Useful tool for matching processes to products.

o Connects only one product attribute with one process competency
o Correlation between process flexibility and product cost: Standardizations typically results in economics of scale and thus
lower variable product cost
o Correlation between process flexibility and product response time: Flow shops typically have shorter flow times than job
shops.
o Product quality bears no direct correlation to layout of resources and connecting routes
2.6 The Operations Frontier and Trade-Offs

 Strategic position supported by consistent business processes that are managed effectively are essential for superior
performance
 Sustained competitive advantage requires good strategic opposition and operational effectiveness
 Operations Frontier – The smallest curve that contains all current industry positions
o Represents the current best practices of world-class firms
o Firms located on the same ray share the same strategic priorities
o Firms operating at the frontier:
 Have the highest operational effectiveness- measure of how well a firm manages its processes
 Their processes provide superior related to the distance of the current position from the (current)
operations frontier
o The closer a firm is to the frontier, measured along its direction of improvement (whose slope represents
the relative strategic priorities assigned by the firm to the four dimensions), the higher its operational
effectiveness
 Trade-off – A decreasing of one aspect to increase another
o Any point on the frontier represents a trade-off
o To increase performance along one product dimension, one must give up some performance along the
other(s)
o Firms not on the frontier, do not face trade-offs – they can improve multiple dimensions simultaneously
o Typically reflected most clearly in the strategies of world-class companies
 TPS – Toyota Production System – Produce exactly what you need, exactly when you need it – instead of focusing on
low cost and no variety, TPS allowed product variety through process flexibility
o Permitted wide variety, high quality, low cost, and short response time
 Strategic Positioning defines the direction of improvement from the current position, improving
 Operational effectiveness reduces the distance of the current position to the current operations frontier along the
direction of improvement
o When a firm’s position of the operations frontier is developed according to the ‘state of best practices’ it
represents the best attainable trade-off between the two dimensions at a given point in time
 Improvements in operational effectiveness bring a company closer to the frontier or move the frontier itself along the
direction of improvement specified by the strategic position

2.7 The Evolution of Strategy and Operations Management

 The factory system was the result of 3 innovations:

o 1. Division of Labor and Functional Specialization – A process and organizational structure where people are specialized
by function, meaning each individual is dedicated to a specific task
 Lead to vast improvements in cost and quality, at the expense of flexibility
 Product Specialization – People are specialized by product, meaning each individual is dedicated to
performing all functions on a specific product line
o Steam Engine (James Watt) – made it possible for powered machinery to replace human labor
o Work Centralization – facilitated economics of scale and led to growth of the assembly line and mass production – large
quantities of goods at a low cost
 Standardization to Mass Production
o 1810 based on the innovations of Eli Whitney and Samuel Colt
o American System of Manufacturing – Introduced the use of interchangeable parts, thereby eliminating the need to
custom-fit parts during assembly
 Moving assembly line
 Technological advances – ‘bicycle boom’
 Flexibility and the Productivity Dilemma
o Flexible Mass Production – A method of high-volume production that allows differences in products – introduced
product variety as a second mode of competition in the automotive industry
o Productivity Dilemma – Chose between the lower productivity entailed by frequent product changes or the higher
productivity that was only possible if they declined to introduce variety into their product lines
 From Scientific Management to Employee Involvement
o Taylor Phiosphy:
 1. Scientific laws govern how much workers can produce per day
 2. It is management’s function to discover and apply these laws to productive operations systems
  3. It is the worker’s function to carry out management decisions without question
o Statistical Quality Control – A management approach that relies on sampling a flow units and stastical theory to ensure
the quality of the process
 Competitive Decisions After WW2
o High demand and scale economies rose to the top of the American strategic agenda
o TQM, JIT, Time-based competition, business reengineering
o Computer-aided design and MFG, flexible mfg. systems, robotics, internet-based processes
 Growth of IT
o Information Technology – The hardware and software used throughout business processes to support data gathering,
planning, and operations
o ERP – Gather and monitor information regarding materials, orders, schedules, finished goods inventory, receivables, and
other business processes across a firm
 Facilitated coordination across business processes

2.8 The Opportunity Today In-Service Operations

 Technological advances have allowed service processes to be designed and executed in a manner that provides increased access
while lowering the production and delivery costs, and improving the response time.
o Resulted in an explosion in new services being offered at high and low end of the economic spectrum
 Improvement in communications have made the transfer of information goods both cheaper, and quicker, while increasing access

Summary

 Strategic Positioning – Deliberately performing activities different from or better than those of the competition
 Operations Strategy – Plans to develop the desired process competencies
 Operational Effectiveness – requires developing processes and operating policies that support the strategic position better than
competitors
o Both strategic positioning and operational effectiveness are necessary for gaining and sustain competitive advantage
 Determining Strategic Fit:
o 1. Determine the strategic positioning by prioritizing the targeted customer needs of product cost, quality, variety, and
response time
o 2. Determine what the process should be good at to support the strategic position – infer the necessary process
competencies in terms of process cost, quality, flexibility, and flow time
o 3. Design a process whose competencies best support the strategy