Chapter 2 - Operations

Strategy and
Competitiveness

Wiley 2010

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

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Business/Functional
Strategy

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

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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

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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:

Product & service consistency:

Superior features, high durability, & excellent customer service

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
McDonalds competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility

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Competitive Priorities front &

center

http://www.businessweek.com/mag
azine/content/06_13/b3977009.htm
http://www.businessweek.com/mag
azine/content/06_13/b3977010.htm
?chan=search
http://www.businessweek.com/tech
nology/content/dec2007/tc2007122
8_106857.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, CDs, 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)
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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
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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 nations 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 longterm 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 companys
resources in producing the companys primary
goods and services.
The role of business strategy is to serve as an
overall guide for the development of the
organizations 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 companys 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 needsDistributed
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.
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http://www.businessweek.com/bwdaily/dnflash/jul2001/nf2001072_224.htm?chan=search

37

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

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