OPERATIONS MANAGEMEMENT --FOCUSING ON QUALITY AND COMPETITIVENESS

CHAPTER TWO -- OPERATIONS STRATEGY

LEARNING OBJECTIVES
Sometimes we hear politicians or company presidents summarize their main ideas in a single catchy
phrase like "Bridge to the 21st Century," or "Morning in America." These phrases are intended to create
a vision, a view of the future about where the leader wants to take us. One of the most important roles
of leaders is creating a consistent message so that everyone follows a common "roadmap" when setting
policy. The vision should form the basis for formulating strategies. When thinking about strategy, we
are interested in answering the following questions:
1. What can go wrong if a firm fails to articulate a strategy?
2. What four steps are used to formulate strategy?
3. What are four competitive advantages that define a firm’s competitive positioning?
4. How do order qualifiers differ from order winners?
5. Why are "abstract" core competencies more useful than concrete core competencies when
creating sustainable strategic advantage?
6. To maintain internal strategic consistency, how should a firm that offers a highly standardized
product differ from one that offers customized, one-of-a kind products?

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LECTURE NOTES -- CHAPTER 2

OPERATIONS STRATEGY
Operations Strategy -- Background
When U. S. mass production was in its heyday (around the 1950’s and 1960’s), the typical operations
manager was seen as something of an efficiency expert – someone with an eye for detail, cost-cutting
fanaticism, and a robot-like response to problems. The stereotype was probably somewhat exaggerated,
but we now acknowledge that part of the decline experienced by U. S. manufacturers in the 1970’s was
due to an inability to "see" how the operations function needed to relate to a changing business
environment. Wickham Skinner, a well-known professor from Harvard, began a revolution in the mid-
1970’s that resulted in the development of strategic thought for the operations function.
Skinner’s most important contribution was in pointing out that the cost-cutting orientation of operations
managers did not mesh well with a changing consumer taste for greater product variety and higher
quality in the 1970’s. During the 1950’s and 1960’s, people were astonished at the prosperity they
began to enjoy. Many young married couples grew up during the Great Depression and World War II
and never expected to own their own homes, get college educations, and enjoy a government "safety
net." The era of the 1950’s was criticized for its "cookie-cutter" housing developments and "keep up
with the Jones’" consumerism, but the pent-up demand for the good life was so strong that mass
production satisfied the needs of most consumers. Unfortunately for operations managers in the 1970’s,
they failed to see that the market’s inevitable push for change would disrupt their tidy world of
"economies of scale" and "learning curve" productivity (as volumes double, production costs decrease
by a fixed percentage).
Think about it – your factory is set up to make one standard product very well, then orders start coming
in for little changes here and there. The operations manager struggles to accommodate the special
orders. Soon, it seems that special orders have become the norm, and somehow the factory has become
a disorganized mess trying to satisfy two distinctly different needs.

Anecdote: Skinner tells the story of an electronic instrument company that made fuel gauges and
automatic-pilot instruments in the same plant. After years of failure to make a profit on fuel gauges, the
company was ready to sell off that portion of the business. As a last resort, the plant manger decided to
build a wall around the fuel-gauge production facilities and manage them separately. As a result, the
equipment and the process technology was segregated, and after 4 months, the fuel gauge business
became profitable! The explanation for this result is that two incompatible product lines were produced
within the same plant and with the same mass production philosophy.

When organizations make choices about the specific emphasis they will place on what products to
make, what services to offer, and how to provide them, we call it strategy formulation. The key to
successful strategy formulation is articulating the choice so that a mismatch between the market and
operations is not created over time.
]
Strategy Formulation
Strategy formulation consists of four basic steps:
• Defining a primary task – represents the primary purpose of the firm, what the firm is in
the business of doing.
• Assessing core competencies – identifying what the firm does better than anyone else.
• Determining order winners and order qualifiers
• Order qualifier – a threshold minimum characteristic that is necessary for the
customer to even consider purchasing it
• Order winner – the characteristic that makes the customer choose the product
over another
• Positioning the firm – choosing one or two important things to concentrate on and do
extremely well.
Let’s review order winners and order qualifiers, then look at some examples of different strategy. Order
qualifiers are those characteristics that must be present for a product to be considered for purchase by a
consumer. For example, for a particular consumer to consider the purchase of skis for a child, the skis
must have certain features like safe construction, parabolic shaping, and proper length. After
identifying the skis that "qualify" with those characteristics, the order winner might be price. The order
winner is the final factor on which the consumer bases the purchasing decision. Order winners and
order qualifiers are sometimes determined by individual customers, but they can also be signaled by the
whole market to an industry. Furthermore, they could change over time.
Example: The home computer industry was initially dominated by IBM and other brand name
computer suppliers. Early on, few consumers knew enough about technology to trust anything other
than a brand name computer. To qualify as a possible purchase, computers had to have a well-known
brand name (order qualifier). Within that group of computers, consumers might then choose the least
expensive or user-friendly choice (order winner). With the advent of IBM clones and greater customer
knowledge of computers, the industry changed dramatically. Price was much more likely to be an order
qualifier, with features the order winner.
 IN-LINE EXERCISE
a. List the order winners and qualifiers that made you choose to take this course from this college.
How do they compare with those for someone who may have chosen Harvard?
Sample Answer
In this next section, strategy formulation is developed further, but if you come across any terms that
you don’t understand, be sure to have a look in the glossary to clarify your understand.
GLOSSARY

Strategy and Competitive Advantage

The study of strategy has developed some complexity over time. In general, the study of business
strategy first identified two basic generic strategies:
• Low-cost strategy

– High volume, mature products

– Long production runs, little customization, emphasis on productivity

• Differentiation strategy
– Low volume, unique products, often customized
– Short runs, flexible production, high quality
Later, the discipline of operations management developed some of its own ideas about strategy. We can
look at how those ideas changed over time. In general, the four major competitive advantages of the
operations function are:
• Low cost
• Speed
• High quality
• Flexibility
Major Approaches to Operations Strategy:
• 1960’s:

• Emphasis on cost alone

• Low competitiveness
• High pent-up demand among WWII adults
As we discussed earlier, this was a period of little thought given to operations strategy.
• 1970’s:
– Strategic tradeoff approach -- choose low cost, high quality, flexibility, or speed

Low Cost
!
Flexibility <------!-------> Speed
!
High Quality
 • Skinner’s work showed the need for concentrating on a single set of tasks for a chosen
competitive advantage
• Competitive advantage was defined along the four dimensions: low cost, flexibility, high
quality, and speedy delivery
• In general, the assumption here was that there are tradeoffs associated with making
choices. For example, choosing to compete on speedy delivery would result in cost
increases that blocked the ability to compete on low cost.

• 1980’s to Present:
– Do all four simultaneously -- Low cost, high quality, flexibility, and speed

Flexibility
! -- _
Quality ---->! >---->Low Cost
!–
Speed
• Most firms today would argue that it is not enough to do well on only one dimension;
firms must do well on all four
• New technologies and work methods allow many firms to perform much better on all
four dimensions than in the past (more on this in later chapters).
• But firms may still choose to emphasize one as a competitive advantage; this is somewhat akin
to order winners/qualifiers – firms must now meet very high thresholds of performance on three
of the dimensions, then excel on the order winning dimension.
• A few firms continue to compete along the old lines by emphasizing a single dimension and
disregarding all others (Rolls Royce/Morgan, although even Rolls Royce, which has been
acquired, is looking at cutting costs)!
• Some analysts would argue that industrialized nations like the U. S. must abandon the low cost
strategic tradeoff approach and leave that method of competition to newly industrializing
nations with low labor and regulatory costs.
Some firms have a clear competitive advantage within their industry. Wal-Mart is an example of a firm
with a low cost competitive advantage within the discount retail industry. Yet, it is also noted for
carrying a wide range of merchandise, some of higher quality than at other discounters, and with
quicker delivery to empty shelves than similar stores. Other industries show much less distinction along
competitive dimensions. For example, mature companies, like Ford and General Motors, have a full
range of product lines that offer different competitive advantages. Mercury, Lincoln, and Cadillac
compete on high quality, while the Escort and Geo compete on low cost value. Both automakers would
certainly argue that none of the four dimensions are to be ignored within each product line, even though
each product line emphasizes a different aspect. Finally, some firms find that their competitive
advantage must change over time. United Parcel Service (UPS) was long known as a low cost
alternative to the U. S. Postal Service. Now, it competes along with Federal Express in the expensive
overnight delivery segment. In summary, it is increasingly difficult to compete on a single competitive
advantage; markets now demand excellence on all dimensions of competitive advantage. Often the firm
that first takes note of new market demands and shifts it emphasis to that dimension becomes the leader
in the industry.
 IN-LINE EXERCISE
1. Think of the hotel/motel industry. Identify the companies below with a low cost competitive
advantage and those with a high quality competitive advantage.
1. Motel 6
2. Hyatt Regency
3. Hilton
4. Super 8
Answer
IN-LINE EXERCISE
a. Are any order qualifiers associated with each hotel, and if so, what are they?
Answer

IN-LINE EXERCISE

b. Your book discusses "mass customization." In essence, this is the ability to custom- tailor
products to each customer’s unique tastes and provide the finished item at low mass production
cost. Look at the items below and choose those which are associated with "mass customization."
1. Computerization
2. Fixed automation
3. Quick changeover from one product to another
4. Long wait times
Answer
DISCUSSION QUESTIONS
1. Can you think of any industry where competitive advantage is not very clear, that is where all
competitors seem to be competing well along all four of the dimensions of strategic advantage?
Do you think this is a consequence of responding to market signals for change (like when UPS
went head-to-head with FEDEX) or of developing multiple product lines to respond to a variety
of competitive pressures?
Core Competency
From your reading so far, you should have noticed how business competition makes things happen
very quickly. Strategic advantage can be a fleeting opportunity. For this reason, core competencies that
are based on abstract ideas and knowledge are thought to be superior to more concrete core
competencies, like superior products and technology. Concrete competencies can be easily imitated;
knowledge-based competencies are far more difficult to duplicate. Successful firms use the following
core competencies to gain competitive advantage:

• Shared Problem-Solving
• Importing Knowledge
• Integrating New Technologies and Methodologies
• Experimenting
 IN-LINE EXERCISES
1. Match the core competencies with the appropriate meaning:

Importing Trying risky new ideas and encouraging individual initiative

Knowledge

Experimentation Making everyone responsible for solving problems; minimal

levels of management and limited technical staff assistance push
problem-solving to employee level.

Shared Problem- Using knowledge from the business environment, competitors,

Solving and suppliers to improve work performance using knowledge from
the business environment, competitors, and suppliers to improve
work performance

Integrating New Constantly looking for ways to improve existing technology and
Technologies and methods, as well as inventing better ways of doing things.
Methodologies

Answer
DISCUSSION QUESTION
1. Take a visit to http://www.southwest.com/press/factsheet.html, and look at the
information there. How does Southwest Airlines use the four core competencies: shared
problem-solving, importing knowledge, integrating new technologies and methodologies, and
experimenting? Add anything else you might know about Southwest Airlines that is not shown
on the website. (Why does SWA use only Boeing 737 jets. Why is SWA headquarters located at
Love Field in Dallas?)
Implementing Strategy
Strategy Deployment or Hoshin Kanri
Strategy is easier to formulate than it is to implement. For successful implementation, action plans must
be clearly indicated. A method of implementation is called policy deployment.
A hierarchy of planning should lead to a cascade of action plans:
• Mission and Vision
• Corporate Strategy
• Functional Strategy (Marketing, Operations, Financial)
• Cascade of Action Plans
Example:

• Mission Action Plan: The company will respond to customer needs faster than anyone else in
 the business
• Corporate Strategy Action Plan: We will reduce the product cycle time by 30%
• Marketing Action Plan: We will create strategic alliances with distributors to shorten
product release time
• Operations Action Plan: We will reduce our supplier base, certify suppliers, and
implement a just-in-time system
• We will reduce our supplier base by 30%
• We will contact our suppliers and notify them that new certification procedures
will be implemented in the next year
• We will determine which suppliers are willing to work with our certification
requirements
• We will set criteria for eliminating suppliers
• Etc.
Operations Strategy – Internal Consistency
Once a strategy is formulated, action plans for implementation should be formed on the basis of
consistency; that is, functional strategies must be consistent with corporate strategy, and plans within
functions must be consistent with each other. Here are some of the areas that form the basis for choice
within the Operations function:
Products and Services (Balancing customization against wait time)
• Make-to-order -- providing customized products for each customer; customer may have
to wait for order; goal is to give customers what they want while avoiding excessive wait
time.
• Make-to-stock – providing more standardized products for customers; customers do not
have to wait, but may not get exactly what they want; goal is to accurately forecast
customer needs and carry enough stock to service most customers
• Assemble-to-order -- providing some customization by assembling standard modules
into customer options; a hybrid of the above two.

Process and Technology (Balancing the degree of product customization against the production
volume)
• Project -- production of very unique, capital-intensive jobs and services, like
construction; usually done off-site (at a customer’s location, not in a factory) –
concerned with balancing schedule, resource cost, and contract performance.
• Batch or job shop production – production of small to medium volumes of customized
products
• Mass production -- production of large volumes of standard products.
• Continuous flow production -- production of high volume of single standard product
that flows, like oil, beverages, foods.
• Newer production technologies – mass customization, flexible manufacturing systems,
agile manufacturing, lean production, computer integrated manufacturing, and computer
aided manufacturing; these allow a combination of batch production advantages with
mass production advantages, that is, product customization at low cost. They will be
discussed further in Chapter 6.
 IN-LINE EXERCISE
1. Match the products with the following four process types:

Project Tricycles

Custom or Batch Production Beer

Mass Production Office Buildings

Continuous Flow Production Leather Saddles

Answer
Capacity and Facilities – Balancing large capital investments against the risk of changing market
demands. These long-term decisions require some guesswork about what the market size will be in the
future. Excess capacity could result in severe under-utilization and high cost, while under-investment
could result in inability to meet customer needs quickly.

Human Resources -- Balancing skill requirements against investments in human resources. Decisions
about human resources are multi-faceted and require a good match among work methods, technology,
skills, and management.

Quality -- Determining the appropriate systems for control and the appropriate emphasis to place on
different types of quality.

Sourcing -- Balancing the need for internal control against the risk of ownership. Here, and
organization must consider how much of the production should be entrusted to other companies – a
classic make-or-buy decision combined with strategic considerations.
• Vertical integration – owning many parts of the production chain (like supermarkets
owning fruit orchards and food processing plants). This entails considerable risk because
when the demand for the product declines, very large parts of the organization are
affected. On the other hand, it offers greater control than outsourcing since the
organization has internal access.
• Outsoucing – purchasing products and services outside the firm. This idea works on the
basis that companies should do only what they do best for overall economic efficiency.
Some internal control is sacrificed for lower costs and less risk.

Operating Systems – executing strategy on a daily basis; FEDEX’s system of centralized sorting is an
example of a strategic operating system. This part of strategy formulation might seem quite procedural
and structured, yet some of the best operating systems are very innovative and creatively designed.
IN-LINE EXERCISE
1. Contrast the internal strategic consistencies of Quick Lube service stations with those of a full
service auto repair shop. Show whether the type of strategic choice goes with Quick Lube or the
full service auto repair shop.

Products and Services: Make-to-Stock (or Standard) Product

 a. Quick Lube
b. Full Service Shop

Process and Technology: Batch or Job Shop Process

a. Quick Lube
b. Full Service Shop
Capacity and Facilities: Many small, dispersed, special purpose shops
a. Quick Lube
b. Full Service Shop
Human Resources: Multi-skilled and highly trained
a. Quick Lube
b. Full Service Shop
Operating System: Highly Structured and routinized
a. Quick Lube
b. Full Service Shop
Answer
DISCUSSION QUESTION

1. Do you agree with analysts that argue companies using a low cost strategic choice must
abandon such production in the U. S. and move it to newly industrializing nations? That is, will
items such as low cost toys and clothing be produced in countries with low wages and large
numbers of low skill workers (like Nike)? If so, would such a practice be tantamount to
exploiting others? Argue your position.

(Discussion points: loss of low wage jobs, low skill job displacement in industrialized nations,
"fair" trade, "industrial policy," exploitation, fair market values, social responsibility)

2. When thinking about outsourcing low cost production to developing nations, we can analyze the
issues by comparing some ideas of Adam Smith against those of Lenin, who saw trade as
essentially exploitative. See if you can form your own beliefs by answering the following
questions: what would the theory of "comparative advantage" say about nations choosing
certain "strategies" of competition? What is the foundation of the theory of free trade? How
does it differ from the trade theory of imperialism?
(Discussion points: economic theories of trade; trade as a zero-sum game (imperialism)
vs. trade as an international economic synergy (free trade); economic vs. political
development – which comes first, democracy or capitalism or can they be achieved
simultaneously?)
Issues and Trends in Operations
Now that we have reviewed some of the reasons for changes that have occurred in operations
management, let’s look at the environment that has demanded these changes. Some trends and issues
that have driven change include:
• Global markets, global sourcing, and global financing
• Virtual Companies
• Product variety and customization; greater choice, more individualism(less mass production of
standard products)
• Emphasis on service
• Speed and Flexibility (ability to change products, volumes, and processes rapidly)
• Supply Chains
• C-Commerce. Collaborative commerce
• Advances in technology (both product and process technology)
• Knowledge
• Ethical and environmental concerns

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