Unit 2: Operations Strategy LH 3
a. Introduction to operations strategy;
b. Operations strategy as a competitive weapon;
c. Linkage between corporate, business and operations strategy;
d. Components of operations strategy;
e. Manufacturing strategies;
f. Service strategies.
A. INTRODUCTION TO OPERATIONS STRATEGY
Strategy describes how a firm intends to create and sustain value for its shareholders. The strategy involves a long-
term process that must foster inevitable change. Strategy can be defined as an integrated set of choices that
positions a firm in an industry so as to generate superior financial returns over the long run. In that context,
strategy can be understood as the plan to manage internal resources that will allow an organization, given the
external environment in which it is operating, to best meet its stakeholders’ interests.
Operations strategy is concerned with setting broad policies and plans for using the resources of a firm to best
support its long-term competitive strategy. Operations strategy is the integration and optimization of operational
functions and processes with market and customer requirements.
B. OPERATIONS STRATEGY AS A COMPETITIVE WEAPON
Operations strategy gives managers a way to see how operations activities fit with the company’s overarching
goals and objectives. The aim is to ensure strategic alignment between operations’ resources and the strategic
objectives of the firm. In practice, creating a new operations strategy or evaluating an existing one occurs in two
distinct steps:
I. Alignment of Competitive Strategy and long-term objectives of operations. The first step is to carefully
define and prioritize a specific set of choices with a set of concrete objectives for the operations function.
These choices do affect the strategic direction of the company and has to align with the overall
competitive strategy of the company.
II. A concrete plan to meet the given objectives. Once objectives are clear and specific, the second step is to
create a plan for fulfilling these objectives. This plan provides a guide and compass for the management
by describing the flow of decisions and actions that develop, organize, and utilize the resources.
Operations strategy is all about the focus on operational strengths to meet its customer’s demand in the most
effective and efficient way. Hence, Operations strategy, performed in a right way, can gain the company a unique
superior position. All the successful companies are able to use operational strength as a competitive weapon.
These companies base their strategies on what they can do better than their competitors. For example, if a
company has a variety of equipment and skills in place, the strategy should be to offer variety and customization.
COMPETITIVE DIMENSIONS
I. Cost: Within every industry, there is usually a segment of the market that buys solely on the basis of low
cost. To successfully compete in this niche, a firm must be the low-cost producer, but even this does not
always guarantee profitability and success. Products and services sold strictly on the basis of cost are
typically commodity-like, in other words, customers cannot distinguish the product or service of one firm
from those of another. This segment of the market is frequently very large, and many companies are lured
by the potential for significant profits, which they associate with the large unit volumes. As a
consequence, however, competition in this segment is fierce – and so is the failure rate. After all, there
can be only one low-cost producer, who usually establishes the selling price in the market.
II. Quality: There are two characteristics of a product or service that define quality: design quality and
process quality. Design quality relates to the set of features the product or service contains. This relates
directly to the design of the product or service. Obviously, a child’s first two-wheel bicycle is of
significantly different quality than the bicycle of a world-class cyclist. The use of special alloys and special
light weight sprocket and chains is important to the performance needs of the advanced cyclist. These
two types of bicycles are designed for different customer’s needs. Process Quality, the second
characteristic of quality, is critical because it relates directly to the reliability of the product or service.
Regardless of whether the product is a child’s first two-wheeler or a bicycle for an international cyclist,
customers want products without defects. Thus, the goal of process quality is to produce defect-free
products and services.
III. Delivery Speed: In some markets, a firm’s ability to deliver more quickly than its competitors are critical. A
bike workshop that can offer bike servicing facility within 2 or 3 hours has a significant advantage over
competing workshops that guarantees the servicing facility only within 24 hours.
IV. Delivery Reliability: This dimension relates to the firm’s ability to supply the product or service on or
before a promised delivery due date. For a service firm such as Federal Express and Foodmandu, delivery
reliability is the cornerstone of its strategy.
V. Coping with changes in demand: In many markets, a company’s ability to respond to increases and
decreases in demand are important to its ability to compete. It is well known that a company with
increasing demand can do little wrong. When a demand is strong and increasing, costs are continuously
reduced due to economies of scale, and investments in new technologies can be easily justified. But
scaling back when demand decreases may require many difficult decisions about laying off employees and
related reductions in assets. The ability to effectively deal with dynamic market demand over the long
term is an essential element of operations strategy.
VI. Flexibility: Flexibility, from a strategic perspective, refers to the ability of a company to offer a wide
variety of products to its customers. An important element of this ability to offer different products is the
time required for a company to develop a new product and convert its processes to offer a new product.
C. LINKAGE BETWEEN CORPORATE, BUSINESS, AND FUNCTIONAL STRATEGY
In the top-down directed model, strategy follows a clear path through the organization, called the strategy
hierarchy. At the top, corporate strategy is concerned with the most aggregate, high-level decisions which
concerns the selection of industries to compete in, the configuration of the business units, the allocation of
required resources and the calculation of expected returns and growth from the businesses.
The next level in the strategy hierarchy is called business unit strategy, which each business unit must develop to
determine how it will compete in its market given the corporate strategy. Business unit strategy decisions include
the choice of position to occupy in the industry and competitive advantage to develop. When a company has only
one business unit, corporate strategy and business unit strategy are one and the same.
Finally, each function within a business unit creates a functional strategy to implement the business unit strategy.
Operations, marketing, finance, and other functions translate the desired market positioning and competitive
advantage into function-specific competitive priorities and performance objectives, and develop a plan for
achieving them. In this view, operations strategy is the translation of the business unit strategy into an actionable
plan for the development, organization, and utilization of operations’ resources to best meet the performance
objectives derived from the business unit strategy.
D. COMPONENTS OF OPERATION STRATEGY
Major components of operations strategies can be classified into following five categories:
I. Product Strategy
II. Location Strategy
III. Layout Strategy
IV. Process Strategy
V. Human Resource Strategy
i. Product or Service Strategy: A company’s operations strategy depends on the kind of products that it
offers to its customers. The product and service design should meet the promise that the company is
making to its customers, and also be able to make profit for its shareholders.
ii. Location Strategy: Location can matter a lot in terms of cost and convenience for customers. Location
near resources and suppliers can result in lower inputs costs. Location near markets can lower the
transportation costs and delivery times. Therefore, a company should have a clear location strategy.
The cost of producing a product may be low at a particular location for the following reasons such as
quality raw materials, low prices, labor availability, low taxes, and infrastructure.
iii. Layout Strategy: The objective of layout is to have a smooth flow of works, materials, and
information throughout the system. The layout of any business can have a significant impact on
customer experience, employee happiness and productivity, processing time and the quality of
output. Layout, thus, is one of the important components of Operation strategy.
iv. Process Strategy: Process strategy refers to pattern of decisions made in managing processes to
achieve competitive priorities. Principles that are particularly important to understand process
strategy are: (a) Good process design makes choices that fits its ground reality. (b) The Individual
processes act as the building blocks that eventually form the firm’s entire supply chain, and (c)
Management must pay close attention to all interfaces between processes in the supply chain,
whether they are performed internally or externally.
v. Human Resources Strategy: A company’s human resources policies should be consistent with its
choice of technology, process, and quality strategies. For example, if a company has decided that its
products will be embedded with the latest technologies, it must have a policy of hiring and nurturing
the best scientists and technologists. It must allow them to have greater control over their jobs.
E. MANUFACTURING STRATEGIES
In order to succeed with the goal of long-term survival and the ability to produce useful output, manufacturing
companies continuously make decisions regarding the deployment of resources. These manufacturing decisions
they determine how the company is operated. By actively taking charge over decisions, the competitive position of
a company can be shaped over time. Decisions within the manufacturing function determine which resources to
use, what routines to use, what practices to employ and emphasize in order to achieve the manufacturing
objectives. The set of practices, resources, routines used ultimately determine the operating characteristics of the
manufacturing system, that is, manufacturing capabilities.
Manufacturing strategies involve a pattern of decisions, both structural and infrastructural, which determine the
capability of a manufacturing system and specify how it will operate, in order to meet a set of manufacturing
objectives which are consistent with the overall business objectives. The definition acknowledges two key
properties of manufacturing strategy content; decisions that determine the capabilities of the manufacturing
system, and the existence of specific manufacturing objectives.
Decision categories outlines the important issues and basis for the manufacturing strategy.
Decision Categories Policy Area
Structural:
- Process Choice Process choice, technology, integration
- Facilities Size, Location, Focus
- Capacity Amount, timing, increments
- Vertical Integration Direction, extent, balance
Infrastructural
- Manufacturing Planning and Control System design, decision support
- Performance measurement Measurements, methods of measures
- Organization Human resources, design
- Quality Definition, role, tools
F. SERVICE STRATEGIES
Service strategy is the set of plans and policies by which a service organization aims to meet its objectives. Service
strategy can be defined as the set of plans and policies by which a service organization aims to meet its objectives.
Five critical elements of strategy in the service context are:
i. The creation of corporate objective,
ii. Understanding of the environment,
iii. Development of an appropriate service concept,
iv. Identification of appropriate operations performance objectives, and
v. Development of appropriate operations.
