OPERATIONS

MANAGEMENT
2. OPERATIONS STRATEGY &
COMPETITIVENESS

 What is operations strategy?

Strategy should describe how a firm
intends to create and sustain value
for its shareholders.

 Typically operations strategy breaks

down into three major components:
1. Operations effectiveness
2. Customer management
3. Product innovation

A firms strategy should align with

its mission of serving customers.
Mission is always about serving
customers. Mission is the means to
the end (Vision).

 Needs (Utility expectation) of the

customers change over time, thus
requiring continuous changes to
strategy.
Operations effectiveness relates to
the core business processes
(functions) needed to run the
business.

 Operations effectiveness reflects

directly in the costs.

Strategies
associated with
operational
effectiveness
Quality initiatives

Process redesign

Product/service
improvements

Waste
minimization

Technological
investments
Capacity/speed

 Customer management relates to

better understanding and leveraging
customer relationships.
Understanding customer:
Who is the customer?
What are his needs?
Segmenting

Understanding customer
Targeting

Leveraging customer
Positioning

 Product innovation involves the

development of new products, new
markets, and better customer
relationships to sustain growth.
New product = Same customers x more products
= More sales volume
New market = More customers x same products
= More sales volume
Better relationship = Same customers x same
products x more business per customer
= More sales volume

Sales volume = Number of customers x number

of products x business per customer per product

 OM is significant since it relates to all

three components of strategy.
A world-class company recognizes
that its ability to compete in the
marketplace depends on developing
an operations strategy that is
properly aligned with its mission of
serving customers.
A companys competitiveness refers
to its relative positioning to other
firms in the local and global
marketplace.

 Business is a N-person zero-sum

game.
Operations strategy is concerned
with setting broad policies and plans
for using resources of a firm to best
support its long-term competitive
strategy.
In other words, Operations Strategy
is playing (to win)
Playing
to win
Resources + Strategy

competitive

 An operations strategy involves decisions

that relate to the design of a process and
the infrastructure needed to support the
process.
Process
Infrastructure

A firms operations strategy is

comprehensive through its integration with
corporate strategy.
A bundle of Operations strategies
strategy
A bundle of Functional strategies
A bundle of Business strategies

Functional
Business strategy
Corporate strategy

 What is a process? A process is a set

of related tasks that make up a
whole, which produces an output.

 Process design includes the selection

of:
1.
2.
3.
4.

Appropriate technology (the how?)

Sizing the process over time (the scale)
The role of inventory (the what?)
Locating the process (the where?)

Infrastructure decisions involve the

logic associated with:
1.
2.
3.
4.

Planning the control system

Quality assurance and control
Work payment structure
Organization of the operations function

 What is planning?
Planning is sequencing in time?

What is organizing?

Organizing is positioning in space?

What is controlling?

Controlling is comparing with a benchmark

and making necessary corrections?

Operations strategy can be viewed

as part of a planning process that
coordinates operational goals with
those of the larger organization.

 Since the goals of the larger organization

change over time, the operations strategy
must be designed to anticipate future
needs (designed to be flexible).
The goal of an organization is growth. It is
an unending journey, since the firm itself
is a going concern.
A firms operations capabilities (strengths,
or what it does better than others) can be
viewed as a portfolio best suited to adapt
to the changing product and/or service
needs of the firms customers.

COMPETITVE DIMENSIONS
Customers have a wide choice
available to them. Out of these large
number of choices, how does a
customer choose one product or
service?
Different customers are attracted to
different attributes, and they make
their choices based on that preferred
attribute.
The attributes become the
competitive dimensions.

 Major competitive dimensions are:

1. Price/cost
Products/services sold strictly on the basis of
price/cost are typically commodity like.

2. Quality
Design quality (set of features)
Quality
Process quality (reliability)

3.
4.
5.
6.

Speed (of delivery)

Delivery reliability (dependability)
Coping with demand change (flexibility)
Innovation

7. Other product-specific criteria

1.
2.
3.
4.

Technical liaison and support

Meeting a launch date
After-sale support
Others : color/size/weight/customization

The Notion of Trade-offs

Central to the concept of operations
strategy is the notion of operations
focus and trade-offs.
The underlying logic is that an
operation cannot excel simultaneously
on all competitive dimensions.

 Consequently, management has to

decide which parameters of
performance are critical to the
firms success and then concentrate
resources of the firm on these
particular characteristics.

Speed vs flexibility
Quality vs cost
Quality vs speed

Plant within plant (PWP) Concept (By

Skinner)
Factory
One
operations
strategy

Low cost
operations
strategy
High flexibility
operations
strategy
High quality
operations
strategy

Three sections of the same factory has three

operations strategy

 A strategic position is not sustainable

unless there are compromises with
other positions.
Trade-offs occur when activities are
incompatible so that more of one
thing necessitates less of another.
For example, an airline can choose to
serve meals adding cost and
slowing turnaround time at the gate
or it can choose not to, but it cannot
do both without bearing major
inefficiencies.

 Straddling occurs when a company seeks to

match the benefits of a successful position while
maintaining its existing position.
Good case study is how Continental Airlines
reacted to the strategy of Southwest Airlines, an
LCA similar to our erstwhile Air Deccan.
While maintaining its position as a full service
airline, Continental set out to match
Southwest on a number of point-to-point
routes. The airline dubbed the new service
Continental Lite. It eliminated meals and
first-class service, increased departure
frequency, lowered fares, and shortened gate
turnaround time.

Because Continental maintained a fullservice airline on the other routes, it

continued to use travel agents and its
mixed fleet of planes and provide
baggage checking and seat assignments.
Trade-offs ultimately grounded
Continental Lite. The airline lost hundreds
of millions of dollars, and a chief
executive officer lost his job. Its planes
were delayed leaving congested hub
cities or slowed at the gate by baggage
transfers. Late flights and cancellations ns
generated a thousand complaints a day.

Continental Lite could not afford to compete

on price with and still pay standard travel agent
commissions, but neither could it do without
agents for its full-service business.
The airlines compromised by cutting
commissions for all Continental flights. Similarly
it could not afford to offer the same frequentflier benefits to travellers paying the much lower
ticket prices for Lite service. It compromised
again by lowering the rewards of Continentals
entire frequent-flier program.
The result: angry travel agents and full-service
customers. Continental tried to compete in two
ways at once and paid an enormous straddling
penalty.

Order Winners and Qualifiers

Concept introduced by Terry Hill, a
professor at Oxford University.
The concept of order winner and
order qualifier describes the
marketing oriented dimensions that
are key to competitive success.
A order winner is a criterion that
differentiates the products/services
of one firm from another.

 A order qualifier is a screening

criterion that permits a firms
products/services to even be
considered for purchase.
It is important to remember that the
order-winning and order-qualifying
criteria may change over time.
Example: Mobile phone

Productivity
Productivity is a measure of how well
an organization is using its resources
(factors of production) available to it.
Since OM focuses on making the best
use of the resources available to a
firm, productivity measurement is
fundamental to understanding
operations related performance.
Productivity = (Outputs/Inputs)

 Productivity is a relative measure. To be

meaningful, it needs to be compared with
something else.
Productivity comparisons are made in two
ways:
First, a company can compare itself with
similar operations within the industry (others).
A company can measure its own productivity
over time.

Productivity may be expressed as:

Partial measures
Multifactor measures
Total measures

 Partial measures

(Output/Labor)
(Output/Capital)
(Output/Materials)
(Output/Energy)

Multifactor measures
(Output /(Labor + Capital + Energy))
(Output/(Labor + Capital + Materials)

Total measures
Outputs/Inputs
(Goods and services produced/All resources
used)

 The process of aggregation and

disaggregation of productivity
measures provide a means of shifting
the level of analysis to suit a variety
of productivity measurement and
improvement needs.
Some examples of partial measures of
productivity:
Restaurant: Customers (meals) per labor
hour
Retail store: Sales per square foot
Chicken farm: Kg. of meat per kg. of feed
Utility plant: Kilowatts per ton of coal

Operations Strategy

What is a business strategy?

 A corporate mission is a set of longrange goals unique to each

organization and including
statements about the kind of
business the company wants to be
in, who its customers are, its basic
beliefs about business, and its goals
of survival, growth, and profitability.
Business strategy is a long-range
game plan of an organization and
provides a road map of how to
achieve the corporate mission.

 The business strategies are

embodied in the companys business
plan, which includes a plan for each
functional area of the business,
including production/operations,
marketing, and finance.
Business strategy is while
considering the external environment
(opportunities and threats) and the
firms distinctive competencies
(strengths and weaknesses).

 Operations strategy is a game plan for

the production of a companys products
and services and provides a road map
for what the production must do if
business strategies are to be achieved.
Operations strategies include:
1.
2.
3.
4.

What new products/services to be developed?

When they must go into production?
What new facilities are required? When?
What new technologies and processes must be
developed? When they are needed?
5. What production schemes will be followed to
produce products/services.

Competitive
Priority

Definition

Ways of creating

Low production Unit cost of each

cost
product / service,
including labor,
material, and
overhead costs

1.
2.
3.
4.
5.

Redesign of product / srv.

New technology
Increased production rate
Reduction of waste
Reduction of inventories

Delivery
performance

Fast delivery

1. Larger finished-goods
inventory
2. Faster production rate
3. Quicker shipping methods

On-time delivery

1. More realistic promises

2. Better control of prodn.
3. Better information
systems.

High-quality
product/srv.

Customers
perception of degree
of excellence
exhibited by
products/srv.

Improve product/srv.s:
1. Appearance
2. Malfunction or defect
rates
3. Performance and function
4. After-sales service

Customer

Customer

1. Change the type

Elements of Operations
Strategy

The elements of operations strategy

are:
1.
2.
3.
4.
5.
6.

Positioning the production system

Product/service plans
Outsourcing plans
Process and technology plans
Strategic allocation of resources
Facility plans:
a)
b)
c)

Capacity
Location
Layout

Positioning and production system

means selecting:
1. The type of product design
a) Custom product
b) Standard product

2. Type of production processing system

a) Product-focused
b) Process-focused

3. Type of finished-goods inventory policy

a) Produce to order
b) Produce to stock

 Product/Service Plans
An important part of business strategy is to plan
for new products and services to be designed,
developed and introduced.
Operations strategy is directly influenced by the
product/service plans for the following reasons:
As products are designed, all the detailed
characteristics of each product are established.
Each product characteristics directly affects how the
product can be made or produced.
How the product is made determines the design of
the production system, and the design of the
production system is the heart of the operations
strategy.

 Outsourcing Plans
Outsourcing refers to hiring out or subcontracting
some of the work that a company needs to do.
Outsourcing has many advantages and
disadvantages, and companies try to determine the
best level of outsourcing to achieve their
operations and business goals.
At one extreme, a company could design a new
product, purchase all the materials, and then
process all of the subcomponents, subassemblies,
major assemblies, and finished products. This
would require the company to have more
employees, a large facility to do all the work, but
the company would have more control over quality
and other production issues.

 At the other extreme, a company could design a

new product, outsource all the production of the
product to one or more subcontractors, and then
distribute the product under its own brand name.
This strategy would require much less capital
investment, but the company loses some control
over quality and production may incur a higher
cost per product unit.

Outsourcing is an integral part of a

companys supply chain, and better supply
chain management has become an
important part of companys operations
strategies.

 Process and Technology Plans

An important part of operations strategy is
the determination of how products and
services will be produced.
Automation is an important aspect of this
plan.

Strategic Allocation of Resources

All companies today have limited resources
available for operations.
Cash and capital funds, capacity, research
labs, workers, engineers, machines,
materials, and other resources are scarce in
varying degrees in each firm.

 These resources must be divided among, or

allocated to, products, business units, projects,
or profit opportunities in ways that maximize
the achievement of the objectives of the firm.
Allocation decisions, which are constrained by
the availability of resources, constitute a
common type of strategic decision to be made
by operations managers.

Facility Plans: Capacity, Location and

Layout
How to set up the long-range capacity to
produce the products/services for a firm is a
critical part of setting the operations strategy.

 Capital investment is required to make

production capacity available.
Land may have to be purchased
Specialized technologies may have to be developed.
New equipments may have to be made or purchased
and installed.
New facilities may need to be located and built.

The decisions involved have long-lasting effects

and are subject to great risk.
The internal arrangement of workers, production
processes, and departments within facilities is a
crucial part of the positioning strategy that
affects the ability to provide the desired volume,
quality, and cost of products and services.

Forming Operations Strategies

The core of operations strategy is the
formation of positioning strategies (custom or
standard products, product-focused or
process-focused production, and produce-tostock or produced-to-inventory), because this
sets the fundamental structure and capacity
of the production/operations system.
It is crucial that the structure of operations
determined by the positioning strategy be
linked to products/service plans and
competitive priorities defined in the business
strategy.

Evolution of Positioning Strategies for a

Product Life Cycle
Introduction

Custom products
Very low production
Process-focused
To-Order
Very small batches

Growth

Slightly standardized products

Low volume
Process-focused
To-Order
Small batches

 High Growth

Standardized products
High production
Product-focused
To-Stock
Large batches

Maturity

Highly standardized products

Very high volume
Product-focused
To-Stock
Continuous

Linking Positioning Strategies with

Market Strategies
Some common
positioning
strategies

CUSTOM PRODUCTS

STANDARDIZED
PRODUCTS

Low
volume

Low
volume

High
volume

Competition
based largely on
production cost,
fast delivery, and
quality. Eg. TV

Productfocused,
To-Stock
Competition
based largely
on production
cost, on-time
delivery, and
quality. Eg.
School buses

Productfocused,
To-Order
Competition based
largely on
flexibility, quality,
and fast delivery.
Eg. Medical
instruments

Processfocused,
To-Stock
Process-

High
volume

Competition
based largely

Problem
Various financial data for 2004 and
2005 for a company are given in the
table below. Calculate the total
productivity measure and partial
measures for labor, capital and raw
materials for this company for both
years. What do these measures tell
you about this company?

2004

2005

Output:

Sales

Rs.200,000

Rs.220,000

Inputs:

Labor

Rs.30,000

Rs.40,000

Raw
Materials
Energy

Rs.35,000

Rs.45,000

Rs.5,000

Rs.6,0000

Capital

Rs.50,000

Rs.50,000

Rs.2,000

Rs.3,000

Other