OPERATIONS STRATEGY

 Specifies how operations can help implement the firm’s corporate strategy
 Links long and short term operating decisions to corporate strategy
 Concerned with setting broad policies and plans for using the resources of the firm to best
support the firms long term competitive strategy
 The approach, consistent with the organizations strategy, that is used to guide the operations
function
 Relate to products, processes, methods, operating resources, quality, costs, lead time and
scheduling

CORPORATE STRATEGY
 Defines the business that the company will pursue, new opportunities, threats in the
environment and the growth objectives that it should achieve
 Provides an overall direction that serves as the framework for carrying out all the organizations
function

BASIC CHOICES INVOLVED IN CORPORATE STRATEGY

1. Mission – answers
 What business are we in? where should we be ten years from now?
 Who are our customers?
 What are the basic beliefs?
 What are the key performance objective such as profits, growth, or market share, by which we
measure success

2.Environment
 Environment scanning – process by which managers monitors trends within the socio
economic environment including the industry, marketplace and society for potential
opportunities and threats
- purpose is to stay ahead of competition
- e.g competitors may be gaining an edge by broadening product lines, improving quality, or
lowering cost
- new entrants into the market/ competitors offers substitutes for the firms products/ services may
threatened profitability
- economic trends, technological changes, political condition, social changes ( attitudes towards
work), availability of vital resources, collective power of customers/ suppliers
-
3. Core competencies – an organizations unique resources and strengths that management
considers when formulating strategy
- reflects the collective learning of the organizations especially in how to
coordinate diverse processes and integrate multiple technologies these are:
a. workforce – well trained and flexible is an advantage because it will allow organization’s to
respond to market needs in timely fashion
b. facilities – well located facilities – offices, stores and plants is an advantage because of the long
lead time to build new ones
c. market and financial know-how – can easily contract capital from stocks sales, market and
distribute its products, or differentiate its products from similar products on the market has a
company advantage
d. systems and technology – expertise in the information systems e.g. banking

2. Global strategies – include buying foreign parts/ services, combating threats from foreign
competitors or planning ways to enter markets beyond traditional national boundaries
- one way for a firm to open foreign markets is to create a strategic
alliance ( agreement with another firm that may take the form of a:
a. collaborative effort – arises when one firm has core competencies that another needs but
unwilling (unable) to duplicate
 one way for a firm to work together to the mutual benefit of both
 e.g. buyer- supplier relationship
b. joint venture – two firms agree to jointly produce a product or service
 often need by firm to gain access to foreign markets
e.g. outside firm supplies-technology or expertise
  producing goods and local firm supplies the resources for operation (local workers and know of
labor practices)

e.g. firms Motorola, Xerox, Ericson are actively involved in ventures in china

c. licensing technology – one company licenses its production or service methods to another
firm, used to join access to foreign markets

-categorizes the firm’s customers; identifies their needs and asses competitors strength.
- It studies the attractiveness and the dynamics of special market within special industry.
-It is part of the industry analysis and thus in turn of the global environmental analysis.

A. Market Segmentation
=identifying group of customers with enough in common to warrant the design and provision of
products or services that the larger group wants need.

(1) Demographic factors = age, sex, education level, income level, marital status, occupation,
religion, location
(2) Psychological factors = pleasure, fear, innovativeness and boredom
(3) Industry factors = used when firms customers use its goods to produce other goods for sale.

B. Needs Assessment
= identifies the needs of each segments and asses how well competitors are addressing those
needs.

= should include both tangible and intangible product attribute and features a customer desires
known ad customer benefit package = consist of core product/service and a set of peripheral
product/services.

Ex: CAR
Core product = features, quality
Peripheral = services offered by the dealer
Customer benefit package = automobile + services provided by dealership

Each market has market needs

Types of market needs

• Product/Service needs = attributes of product / services such as price, quality and degree of
customization desired.

• Delivery System needs = attributes of the process and the supporting system and resources
needed to deliver the product / service.
Ex: availability, convenience, courtesy, safety, delivery spaced and predicting in volume.

• Volume needs = attributes of the demand of the product / service

ex: high or low volume, degree of variability in volume, and degree of predictability of volume

• Other needs = attributes not directly relating to operations.

Ex: reputation an number of years in business. Technical after sale support, ability to invest in
international and financial markets, Accurate and reliable billing and accounting system,
production / service design capability.
 COMPETITIVE PRIORITIES FOR OPERATIONS

4 competitive priorities for operations

1. Cost
2. Quality
3. Time
4. Flexibility

1. Cost
= low cost options
= lowering prices can increase demand for product and services but it also reduces profit
margins of the product / service cannot be produce at lower cost
= lowering cost requires additional investment in automated facilities and equipment
2. Quality
High performance design = include superior features, close tolerances, greater durability,
helpfulness, courteousness, and availability of service employees, convenience of access to
service locations; and safety of product/ services.
Consistent quality = measures the frequency with which the product / services meets design
specification
= managers need to design and monitor operations to reduce errors
3. Time
a) Fast delivery time = is the elapsed time between receiving a customer’s order and filling it;
called as lead time.

b) On time delivery = measures the frequency with which delivery time promises at met.
Manufacturers measure on time delivery as the percentage of customer orders shipped w hen
promised; with 95% often considered as the goal.

c) Development speed = measures how quickly a new product / service is introduced, covering the
elapsed time from idea generation through final design and production; important in fashion
apparel industry

4. Flexibility

a. Customization = is the ability to satisfy the unique needs of each customers by changing
product or service designs.
= operation system must be flexible to handle specific customer’s needs or changes
in designs

b. Volume flexibility = ability to accelerate or decelerate the rate of production quickly to handle
large fluctuations in demand.

FLOW STRATEGY

= primary element of operations strategy.

= determines how the operations is organized to handle the volume and variety of product /
services for a specific marketing segment
= doesn’t define the specific processes to use or the specific resources to organize but it
identifies the nature of the operations required to accomplish the firms goals for a particular
market segment.
= serves as a check, whether the firms structure reflects the marketing segment it is trying to
serve.

1. Flexible flows strategy

= system is organized and the processes used to produce the product / service.
 = use to produce a wide range of low volume product / service

• ex: manufacturing ; drilling machines (one process)

welding machines (another process)

• Banks account payable (department)

credit checks (department)

2. Line flow strategy

=system is organized around the product or service itself
= system is organized around which accept equipment and employees.
= fits high volume production of a few product / services and lending itself to highly automated
facilities.
= all products / services follow a linear pattern in the facility; may duplicate operations, but
products / customers don’t have to complete for limited resources.

Strategies based on flows

a. make – to – stock
= firms hold items in stocks for immediate delivery, thereby minimizing customer delivery times.
= it is feasible because line flow firms produce high volumes of relatively few standardized
products for which they can make reasonably accurate forecast.
= applicable in which the firm is producing a unique product for a specific customer if the
volumes are high enough.

Ex: products = garden tools, soft drinks and chemicals, electric components

b. standardized services
= the firms provide services with little variety in high volumes.
= typical competitive priories are consistent quality, on time delivery and low cost.

Ex: parcel processing

Letter processing ex ; fedex

c. assemble to order strategy

= producing products with many options from relatively few assemblies and components after
customer orders are received.

ex: upscale upholstery manufacturer

long distance telephone service
internet access,
cell phone,
credit cards,

d. make to order strategy

= used by manufacturers with flexible flows whereby they make products to customer
specifications of low volumes.
= provides high degree of customization
Ex: specialized medical equipment, castings and expensive homes

e. customized service strategy

 = utilized by service providing with flexible flows; they provide highly individual services often in
low volumes.
= competitive priorities = high performance design

• ex: barber shops, body salons, small appliance repair, interior decorating services

• = firms flexible processes generates customized product / services in high volumes at

reasonably low cost.

• = attempt to provide the variety inherent in an assemble to order strategy but often focus on
relatively high volume markets

• = used to translate product or service plans and competitive priorities for each market segment
the firm serves into decision throughout the operations functions that supports those market
segments.

• Flexible flows
• Tendency for customized product and service with low volume
• High performance design quality
• More emphasis on customization & volume flexibility
Long delivery time
 DECISION MAKING PROCESS
- Fundamental process of management
- Act of selecting a preferred course of action among alternatives.

STEPS:
1) IDENTIFYING THE PROBLEM
- Focal point of the process
- Recognize the need for a decision

 PROBLEM – an opportunity to change or improve as well as a failure to achieve some intended

objectives. Must be properly defined once its symptoms have been recognized.

2) SPECIFYING OBJECTIVES AND THE CRITERIA FOR CHOOSING A SOLUTION

- Common criteria relate to costs, profits, ROI, increased productivity, risk, company image,
impact of demand, etc.

3) DEVELOPING ALTERNATIVES SEARCH FOR REASONABLE ALTERNATIVES

- Efforts expended in carefully identifying alternatives can yield substantial dividends in terms of
the overall decision
- It is seldom possible to identify and explore all possible alternatives due to limitations of time
and money and talent.

4) ANALYZE AND COMPARE ALTERNATIVES (EVALUATION OF ALTERNATIVES)

- Objective is to compare the consequences one can expect as a result of selecting particular
alternatives.
- Includes a formal, explicit computation of the expected consequences that consider both the
possible outcomes and the likelihood that they will occur.
- Obtain the necessary resources to attempt a particular alternatives

5) SELECTION OF THE BEST ALTERNATIVES

- Selection may be based on the degree to which alternative appears to achieve the objectives.
- The greater the effort in the previous phases, the more satisfactory the decision is likely to be.

6) IMPLEMENTATION OF THE CHOSEN ALTERNATIVE

- Carrying out the actions, indicated by the chosen alternative

7) MONITOR THE RESULT TO ENSURE THAT DESIRED RESULTS ARE ACHIEVED

- If desired consequences have not been achieved, the decision maker may have to repeat the
entire process or perhaps a review of the situation may reveal an error in implementation, an
error in calculations, or a wrong assumption that will allow the situation to be remedied quickly.

NOTE: the decision process is not always completed in a sequential manner. Instead there is
usually a certain amount of backtracking and feedback, especially in terms of developing and
analyzing alternatives.

CAUSES OF POOR DECISIONS

1) Managers failure to appreciate the importance of each step in the decision making process.
Managers may skip a step or not devote enough effort to completing it before jumping to the
next step. Sometimes, this happens owing to a manager’s style of making quick decision or a
failure to recognize the consequence of a poor decision: The manager’s ego can be a factor.
2) Other managers seem oblivious to negative results and continue the process they associate
with their previous success, not recognizing that some of that success was done more to luck
than to any special ability of their own. Also, part of the problem maybe the manager’s
unwillingness to admit a mistake.

3) Other managers demonstrate an inability to make a decision. They shall take long past time
when the decision should have been rendered.

4) Bounded Rationality – limitation on decision making caused by costs, human abilities, time,
technology and availability of information. Managers cannot always expect to reach decisions
that are optimal in the sense of providing the best possible outcome, instead they must often
resort to achieving a satisfactory solution.

5) Organizations typically departmentalize decisions which may result to sub optimization – the
result of different departments each attempting to reach a solution that is optimum for that
department. What is optimal for one department may not be optimal for the organization as a
whole

DECISION ENVIRONMENT
- Operation management decision environments are classified according to degree of certainty
present:

3 BASIC CATEGORIES

1) CERTAINTY
- Environment in which relevant parameters have known values.
- Means that relevant parameters such as cost, capacity, and demand have known values
- The decision maker knows which state of nature will occur
- E.g. profit/unit is P50. You have an order for 200 units. How much profit will you make? (profits
and total demand are known)

2) RISK
- Environment in which certain future events have probable outcomes
- Means that certain parameters have probabilistic outcomes
- The decision maker does not know which state of nature will occur but can estimate the
probability that any one state will occur.
- E.g profit/ unit is P50. Based on previous experience there is a 50% chance of an order for 100
units and a 50% chance of an order for 200 units. What is expected profit? (demand outcome
are probabilistic)

3) UNCERTAINTY
- Environment in which it is impossible to assess the likelihood of various future events
- Means that it is impossible to assess the likelihood of various future events
- The decision maker lacks sufficient information even to estimate the probabilities of the possible
states of nature
- E.g. profit is to P50/unit. The probabilities of potential demand are unknown.

NOTE: These three decision environments require different analysis techniques. Some
techniques are better suited for one category than for others.
 ELEMENTS OF DECISION MAKING
1. A set of possible future conditions exist that will have a bearing on the results of the decision.
2. A list of alternatives for the manager to choose from.
3. A known payoff for each alternative under each possible future condition.
PROCESS OF DECISION MAKING
1. List the feasible alternatives
- One alternative that should always be considered as a basis for reference is to do nothing or to
maintain Status Quo.
Ex.: where to locate a new retail store in a certain part of the city

2. List the events (chance events or states of nature) that have an impact on the outcome of the
choice but aren’t under the managers’ control
 States of Nature- possible future conditions; these events must be mutually exclusive and
exhaustive- they don’t overlap and that they cover all eventualities.
Ex.:
a) Number of contracts awarded will be one, two or three
b) Competitors will or will not introduce a new product
c) Demand experienced by the new facility could be: low, medium or high
Location
Depending on Competition then group events into reasonable
General retail/ trends categories*
*e.g. average of sales per day could be from 1 to from 500 units. The manager can represent
demand with just 3 events: 100 units/day, 300 units/day or 500/day.

3. Calculate/determine/estimate the payoff for each alternative in each event.

- typically the payoff is in terms of total profit or total cost
- these payoffs can be entered into a payoff table
 Payoff table- shows the expected payoffs for each alternative under the various possible states
of nature
- helpful in choosing among alternatives because they facilitate comparison of alternatives

 Payoffs are in terms of present values which represent equivalent current peso
values of expected future income

4. Estimate the likelihood of each event using past data, executive opinion and other forecasting
methods.
- express it as probability, making sure that the probabilities sum to 1.0; develop probability
estimates from past data if the past is considered a good indicator of the future.
5. Select a decision rule or criterion to evaluate the alternatives and select the best alternative
e.g. choosing the alternative with the lowest expected cost

A. DECISION MAKING UNDER CERTAINTY

- manager knows which event will definitely occur under each alternative
- decision rule is to pick the alternative with the best payoff for the known event
- the best alternative is the highest payoff if the payoffs are expressed as profit, if the payoffs
are expressed as costs, the best alternative is the one having the lowest payoff
- the decision is usually relatively straight forward: simply choose the alternative that has the best
payoff under state of nature

B. DECISION MAKING UNDER UNCERTAINTY

-no information is available on how likely the various states of nature are.
4 Decision rules or criteria
A. Maximin - It maximizes the minimum payoffs given the various decisions that are possible.
-Its rule is a very conservative one that takes a pessimistic view on the various
states of nature.
B. Maximax - It maximizes the maximum payoffs for the different decisions starting with the
identification of the maximum payoffs of each alternative decision (optimistic view).
C. Laplace – determines the average payoff for each alternative and chooses the alternative
with the best average.
D. Minimax Regret – determine the worst regret for each alternative and choose the alternative
with the “best worst”

C. DECISION MAKING UNDER RISK

- The manager or decision maker has estimates of the probabilities of the various states
of nature or is willing to make them
- The manager can list the events and estimate their probabilities; the manager has less
information than with decision making under certainty but more information than with
decision making under uncertainty
- Widely used approach under this is the Expected Monetary Value Criterion.

Expected Monetary Value (EMV)

- The best expected value among the alternatives
- Sum of the payoffs for an alternative where each payoff is weighted by the probability for
the relevant state of nature or the expected value for an alternative is found by weighing
each payoff with its associated probability and then adding the weighted payoff scores-
the alternative with the best expected value (highest for profit and lowest for cost) is
chosen.