Operations and Supply Chain Strategies

Operations and Supply Chain Strategies
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COURSE DESIGN COMMITTEE
Chief Academic Officer Content Reviewer

Dr. Sanjeev Chaturvedi Mr. R Vijayan
NMIMS Global Access – Visiting Faculty, NMIMS Global
School for Continuing Education Access - School for Continuing Education
Specialization: Operations , Supply Chain
Management
TOC Reviewer TOC Reviewer

Ms. Brinda Sampat Mr. Kali Charan Sabat
Assistant Professor, NMIMS Global Assistant Professor, NMIMS Global
Access - School for Continuing Education Access - School for Continuing Education
Specialization: Information Technology Specialization: Operations Management
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Author: Arpita Singh

Reviewed By: Mr. R Vijayan
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Copyright:
2018 Publisher
isBn:
978-93-86052-19-3
address:
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NMIMS Global Access - School for Continuing Education

C O NTENTS
CHAPTER NO. CHAPTER NAME PAGE NO.
1 Introduction to Operations Strategy 1
2 Designing Operations Strategy 41
3 Formulating Corporate-Level Strategy 75
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4 Formulating Business-Level Strategy 117
5 Process Planning and Improvement 149

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6 Strategic Capacity Management 177
7 Introduction to Supply Chain Strategies 197

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8 Supply Chain Restructuring 223

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9 Metrics and Drivers of Supply Chain 243
Supply Chain Strategies and

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Performance Measures
11 Case Studies 281

O p e r at i o n s an d S u pply Cha in
S tr ate g ie s
c u r r i c u l u m
Introduction: What is operations strategy, Aims of operations strategy, Contents of an operations

strategy, Operations competitive dimensions, The corporate strategy design and competitiveness
process, Operations strategy: formulation and support, Strategic fit-fitting operational activities to
strategy, Basic understanding of learning curve
Designing an Operations Strategy: Approach to design, adjusting an existing strategy, Steps of the
designing process, Top-down or bottom-up design, designing the purpose of operations, designing
the operations mission, Designing the operations goals and objectives
Formulating Corporate & Business Level Strategy: Corporate level - Balanced Score Card; Stra-
tegic alternatives, Growth/expansion strategy, Diversification strategy, Stability strategy, Retrench-
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ment strategy, Turnaround strategies, Combination strategies; Business level - Porter’s compet-
itive strategies, Competitive advantage, Competitive advantage factors, How to build or acquire
competitive advantage? Acquiring core competence, Low cost strategies, Differentiation strategies,
Focus strategies
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Focussed Operations Strategy: Focus on cost, Focus on product differentiation, Focus on niche
or specialised products, Focus on material management, Focus on timing, Focus on productivity
improvement, Focus on human resource management, Focus on other factors, Benefits of focus
Process Planning and Improvement: Product and process, Types of process, Process technol-
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ogy, Automation in manufacturing, Automation in services, Process improvement, Approach to

improvement, Steps in improvement, Continuous improvement
Strategic Capacity Management: Capacity management in operations, Capacity planning con-

cepts, time horizons for capacity planning (long, intermediate and short range), capacity focus, ca-
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pacity flexibility, determining capacity requirements, planning service capacity, capacity utilisation
and service quality
Introduction to Supply Chain Strategies: The evolution of manufacturing and supply chain strat-
egies; Production and logistics strategy – Lean production, Agile supply chains and mass customi-
sation, Taxonomy of supply chain strategies; Critical factors considered in supply chain planning;
Operational and strategic issues in global logistics; Logistics outsourcing strategy (3 PL and 4 PL)
– Types of logistics companies.
Supply Chain Restructuring: Supply chain mapping; Supply chain process restructuring; Post-
poning the point of differentiation; Re-engineering improvement in SCM
Metrics and Drivers of Supply Chain: Framework for supply chain drivers; Facilities/inventory/
transportation/ information/ sourcing/ pricing; Managing performance with metrics; Supply Chain
Operations Reference model (SCOR)
Supply Chain Strategies & Performance Measures: Customer service & cost trade-off; Drivers of
supply chain: Internal & external performance measures; Linking supply chain & business perfor-
mance; Enhancing supply chain performance

C h a
1 p t e r
INTRODUCTION TO OPERATIONS STRATEGY
CONTENTS
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1.1 Introduction
1.2 Concept of Strategy
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1.2.1 Levels of Strategy
1.2.2 Process of Formulating Strategies
Self Assessment Questions
Activity
1.3 Concept of Operations Strategy
1.3.1 Objectives of Operations Strategy
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1.3.2 Contents of Operations Strategy

1.3.3 Types of Operations Strategies
Activity
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1.4 Operations Competitive Dimensions

1.4.1 Corporate Strategy Design and Competitiveness
Activity
1.5 Operations Strategy – Formulation and Support
Activity
1.6 Strategic Fit – Fitting Operational Activities to Strategy
1.6.1 Basic Understanding of Learning Curve
Activity
1.7 Revising and Updating the Operations Strategy
Activity
1.8 Summary
1.9 Descriptive Questions
1.10 Answers and Hints
1.11 Suggested Readings & References

2 Operations and Supply Chain Strategies
Introductory Caselet
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HOW HARLEY-DAVIDSON SWOTTED ITS OPERATIONS

STRATEGY
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Source: www.ktrk.com
INTRODUCTION
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Established in Wisconsin in 1903, Harley-Davidson, Inc. (H-D), or
Harley, is one of the world’s largest motorcycle manufacturers.
Harley-Davidson is an iconic motorcycle brand widely known
for its loyal customer following. It was one of the two motorcycle
manufacturers that survived in the Great Depression, the other
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being, ‘Indian Motorcycle Manufacturing Company’.
THE DECLINE
Harley-Davidson had fallen to the brink of bankruptcy in the ear-

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ly 1980s. This was due to various factors, such as increased com-

petition from Japanese motorcycle makers, decline in quality of
Harley’s motorcycles and recession.
In 1981, a group of executives, led by the then Chief Executive Of-

ficer of Harley-Davidson, Vaughn Beals, came together to rescue
the company. They managed a leveraged buyout from the Ameri-
can Machine and Foundry (AMF). The first step that Harley took
was applying quality control measures used by Japanese compa-
nies to augment their products and their manufacturing process.
Moreover, the middle level and line workers were given greater
decision-making authority. These advancements were supported
by an innovative marketing strategy to attract new customers and
appease its loyal customer-base. Harley-Davidson had managed
to stay ahead of competition by the end of 1987 and proved that
the company could successfully compete, survive and flourish in
the global market.

INTRODUCTION TO OPERATIONS STRATEGY 3
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IMPROVING QUALITY BY MIMICKING JAPANESE

MANUFACTURERS
Harley-Davidson had been affected by a continual lack of quality

over the years. The company had been focused on manufactur-
ing quantity rather than monitoring quality. Due to this incompe-
tence, in 1980, more than 50 per cent of the motorcycles leaving
assembly lines failed inspection checks and needed repairs.
In comparison, the Japanese motorcycle companies had suffered

failure in only 5 per cent inspection checks. As per the observa-
tion by the Cycle World Magazine, Some of the hardware found on
Harley Davidsons looked as if it were hammered out of iron ore by
rock-wielding natives along the shores of the Milwaukee River. The
Harley-Davidson dealers had to put cardboards and padding to
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absorb leakage of oil from the bikes. Even loyal Harley vendors
became disillusioned as they too started selling Japanese bikes.
At first, we found it hard to believe we could be that bad—but we
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were, said Vaughn Beals in 1982. Beals and his fellow associates
concluded that major steps would need to be taken to save the
company. We were trying to work within a production system that
was basically flawed, he said.
The company discovered a solution in Japanese factories. Har-

ley’s leading executives undertook a tour of the Honda motorcycle
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plant in Ohio in 1982. They were astonished to see a well-ordered

assembly line, positive labour relations and a thin management
staff. Honda only had 30 supervisors for the 500 employees work-
ing at the plant. Even more remarkably, Honda had managed to
keep high productivity despite minimal computerisation of the
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facility while Harley-Davidson had recently invested in expen-

sive computerisation of its factory plant to improve its factory
management. Beals realised the difference between Harley and
its Japanese competitors. It wasn’t robotics or culture or morning
calisthenics and company songs; it was professional managers who
understood their business and paid attention to detail, Beals said.
Harley-Davidson’s Senior Vice-President, Operations, Tom Geib,
had researched about the Japanese manufacturing procedures
and practices and concluded that, We have to play the game the
way the Japanese play it—or we’re dead.
IMPLEMENTATION OF NEW OPERATIONS STRATEGY
Harley had started a pilot programme based on Japanese prac-

tices in 1981 before its executives had gone on a tour of the Hon-
da facility. They had immediately discovered that costs could be
saved on inventory and storage. This decision was helpful in mak-
ing payments for the company’s debts. By reducing the invento-
ry, it helped to create more space on the factory floor. This was

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critical in removing assembly-line bottlenecks. Harley-Davidson

termed this ‘Materials as Needed (MAN)’, wherein defective or
faulty parts could be detected before they go into circulation. Due
to the fact that inventories were now supplied in smaller batches,
adjustments could be made in the inventory before the next batch
arrived. MAN was instrumental in reducing Harley’s inventory by
75 per cent and enabled its two assembly plants to operate with-
out keeping any stockrooms.
Harley registered the following improvements as a result of revis-

ing its operations strategy:
Inventory levels reduced by 75 per cent
Off-the-line completion of motorcycles jumped from 76 per-
cent to 99 per cent
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Scrap and rework on motorcycles reduced by 68 per cent
Productivity increased by 50 per cent
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Space requirements reduced by 25 per cent
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learning objectives
After studying this chapter, you will be able to:

>> Explain the concept of strategy
>> Discuss the meaning of operations strategy
>> Discuss operations competitive dimensions
>> Describe how operations strategy is formulated
>> Discuss the concept of strategic fit
>> Explain the importance of revising and updating the opera-
tions strategy
1.1 INTRODUCTION
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The major concern of every organisation is how it is going to survive
and prosper in the future. To survive the tough competition and to
prosper in the future, an organisation has to set its strategy, which is a
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long-term direction of actions to ensure success.
In an organisation, the operations function is concerned with getting

the things done, i.e., producing goods/services for customers. Most
of the activities within the operations function are the day-to-day ac-
tivities. These day-to-day activities when considered in their totality
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constitute the long-term strategic direction of the organisation. There-

fore, an organisation needs an operations strategy to make appropri-
ate decisions related to its operations function.
In operations strategy, the key operations decisions are made in accor-

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dance with the overall strategic objectives of an organisation. These

decisions can be related to the selection of production technique and
process, the extent of manufacturing capacity and the type of prod-
ucts to be produced.
In this chapter, you will study the concept of strategy and operations
strategy in detail. You will also study different competitive dimensions
within an organisation. Next, the chapter will explain the process of
formulating an operations strategy. You will also study the concept of
strategic fit and learning curve in detail. Towards the end, the chapter
will explain the importance of revising and updating the operations
strategy.
1.2 CONCEPT OF STRATEGY

You can define the word “strategy” as a plan of actions to achieve a
set of pre-determined and specific goals. The word strategy originates
from the Greek word ‘Strategia’, meaning a military general. There is
no definite meaning given to strategy, as various authors have defined
the term “strategy” in different ways. According to Henry Mintzberg,

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“People use “strategy” in several different ways, such as:

Strategy is a plan, a “how,” a means of getting from here to there.
Strategy is a pattern in actions over time; for example, a company
that regularly markets very expensive products is using a “high-
end” strategy.
Strategy is position, that is, it reflects decisions to offer particular
products or services in particular markets.
Strategy is a perspective, that is, vision and direction.”
According to Kenneth Andrews, Corporate strategy is the pattern of

decisions in a company that determines and reveals its objectives, pur-
poses, or goals, produces the principal policies and plans for achieving
those goals, and defines the range of business the company is to pursue,
the kind of economic and human organisation it is or intends to be, and
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the nature of the economic and non-economic contribution it intends to
make to its shareholders, employees, customers, and communities.
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According to Johnson and Scholes, Strategy is the direction and scope
of an organisation over the long term, which achieves advantage for the
organisation through its configuration of resources within a challenging
environment, to meet the needs of markets and to fulfil stakeholder ex-
pectations.
A strategy furnishes a platform for an organisation to better perform

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and achieve a competitive edge. The concept of strategy can be made

clear by looking at its objectives, which are as follows:
To provide direction and stability to the organisation
To determine policies and tactics to achieve goals and objectives of
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the organisation
To help the organisation to prioritise targets based on organisa-
tional resources
To facilitate the planning and execution of long-term, medi-
um-term, short-term and day-to-day plans
To facilitate the decision-making process
To allocate resources to various departments of an organisation
To increase organisational effectiveness by making a judicious use
of organisational resources, such as funds, human resources, tech-
nology and infrastructure
To define the code of conduct that lays down various rules and
policies for an organisation
In the modern business world, the term “strategy” is widely used and
applied in industries. For instance, strategies are adopted to gain the
market share from competitors. Let us now study different levels of
strategy.

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1.2.1 LEVELS OF STRATEGY
Every organisation needs to have a strategy in order to beat competi-

tion and stay ahead. A strategy is practiced at three different levels in
an organisation. These levels are depicted in Figure1.1:
Levels of
Strategies
Corporate-level Business-level Functional-level

Strategy Strategy Strategy
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Figure1.1: Levels of Strategies in an Organisation
Let us discuss these levels as follows:

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Corporate-level strategy: This strategy is designed by the top
management consisting of the Board of Directors and the Chief
Executive Officer. A corporate-level strategy helps in achieving
objectives by analysing all business opportunities available to an
organisation. Corporate-level strategies help in developing objec-
tives, allocating resources and coordinating with Strategic Busi-
ness Units (SBUs). A corporate-level strategy is futuristic, inno-
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vative and pervasive in nature. It includes major decisions, such

as mergers, takeovers, liquidations and diversifications. It relates
with the ‘what’ aspect of the business. Following are some of the
critical questions that are addressed by a corporate-level strategy:
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In what all businesses should the organisation enter?

How should available resources be allocated to different busi-
ness units of an organisation?
What should be the diversification strategy of an organisation?
Should an organisation have strategic alliance with other or-

ganisations? If yes, what type of strategic alliance?
What should be the organisational structure like?
What should be the roles, responsibilities and objectives of
each business unit of an organisation?
Exhibit
Concept of Strategic Business Units (SBUs)
Large organisations often divide their entire business into smaller

and independent segments. This aids in carrying out the operations
effectively and efficiently. These independent business segments

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are called Strategic Business Units (SBUs) of an organisation. Ac-

cording to Sharplin, SBU is any part of a business organisation
which is treated separately for strategic management purpose. SBUs
are also known as strategy centres or strategic planning centres.
An SBU can be a separate division, a single product or the entire

product line of an organisation. Different SBUs in an organisation
have their unique mission and objectives. The SBUs also have
clearly defined business areas and competitors.
Business-level strategy: The business heads of each SBU design

this strategy. A business-level strategy allocates resources among
functional areas of a business. In addition, it is more specific and
action-oriented as compared to the corporate-level strategy. It re-
lates with the ‘how’ aspect of the business. Business-level strate-
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gies help in:
establishing coordination among different business units, for
creating synergy and implementing the corporate-level strate-
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gies of an organisation
evaluating the needs of the market and delivering products
and services accordingly
creating a sustainable competitive advantage for each business
unit
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accomplishing corporate-level strategies

Functional-level strategy: This strategy is designed by functional
managers to carry out day-to-day activities of an organisation. In
this strategy, resources are allocated to each operation of the busi-
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ness. The functional-level strategy ensures development and coor-

dination of resources in an organisation. It can be further divided
into operational-level strategies. For example, a marketing strat-
egy is divided into sales, distribution and promotional strategies.
The main objectives of a functional-level strategy are as follows:
To facilitate coordination among different functional areas,
such as marketing, finance, human resource and production
To align each functional area with the respective business-lev-
el strategies, thereby helping in attaining corporate-level strat-
egies of an organisation
1.2.2 PROCESS OF FORMULATING STRATEGIES
A strategy is important for every organisation. Therefore, every or-

ganisation aims at formulating strong strategies. The process of
formulating strategies goes through various stages, as shown in
Figure 1.2:

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Analysing the Vision and Mission of the Organisation
Scanning the Organisational Environment
Setting Objectives and Goals
Identifying Alternate Strategies
Choosing the Strategy
Figure 1.2: Stages in Strategy Formulation
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Let us discuss the stages of strategy formulation in detail.
1. Analysing the vision and mission of the organisation: Vision
and mission are the two elements that describe the nature,
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direction, future, goals, shape, hierarchy, products and services
and areas of operation of the business. The vision statement
provides the organisation’s long-term goal, whereas the mission
statement is the path to achieve the vision.
Analysing vision and mission statements helps the strategists
to develop strategies for achieving organisational goals. This
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analysis provides guidelines for the following concerns:

What strategies need to be developed?
What are the tools required for strategy formulation?
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How the strategy is going to be implemented?

What is the level of involvement of employees at different
functional levels?
2. Scanning the organisational environment: It involves studying
the external and internal environment of a business. It is
necessary to study the environment for knowing the strengths,
weaknesses, opportunities and threats of a business. This study is
called environment appraisal. It involves scanning the business
environment.
The business environment is complex, dynamic and multifaceted
as it consists of various factors that interact with each other and
change with time. Various sources of information that help in
environmental appraisal are as follows:
Sources, such as reports published by government, banks,
competitors, industry federations, internal reports of various
organisations and so on

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Mass media, such as TV, radio or surveys published in news-

papers
Employees, who help organisations to know the external en-
vironment, as they are the ones who interact with the cus-
tomers
Internal reports of the organisation, such as financial reports,
daily reports and performance reports
Environment appraisal is divided into two parts, namely in-
ternal appraisal and external appraisal.
99 Internal appraisal: It helps to know the strengths and
weaknesses of the organisation, which further helps to
analyse the gap between available and required resourc-
es. Internal appraisal includes scanning organisational
resources, behaviour, strengths, weaknesses and core
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competencies. These organisational variables are con-
trollable in nature. The organisation can either modify
its plans, policies and strategies based on these factors
or modify these factors based on their plans, policies and
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strategies.
99 External appraisal: It helps to know market threats
and opportunities affecting the business. Organisations
cannot modify external environment variables based on
their plans, policies and strategies; they simply need to
adapt changes for sustaining in the market.
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External appraisal involves scanning the micro and mac-

ro environment factors. Micro environment factors are
somewhat controllable in nature. They are affected by
factors such as competitors, customers, suppliers and
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government policies. Macro environment factors are un-

controllable in nature. These factors are affected by polit-
ical, economic, social, technological, legal and ecological
factors.
3. Setting objectives and goals: It involves identifying the long-
term plans of the organisation and making objectives and goals
to achieve them. Objectives and goals provide direction to
strategy formulation. Objectives and goals should be set using
the SMART criteria, which is as follows:
Specific: Goals and objectives must be clear, concise and
state exactly the targets to be achieved.
Measurable: A measurable objective is something that can
be quantitatively described. An objective should be measur-
able as it can help in determining the effectiveness of a par-
ticular approach from different standpoints. In other words,
measurable objective can help in measuring the progress
made towards the achievement of objectives.

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Achievable: An objective should be realistic, attainable and

action-oriented, depending on environmental and organisa-
tional factors.
Relevant: Objectives should be result-oriented, rewarding
and relevant to the employees of the organisation.
Time-bound: Objectives should have a definite time-frame of
completion.
4. Identifying alternate strategies: This refers to recognising
different strategies for growth. These strategies are also known
as grand strategies. Some major strategies are as follows:
Stability strategy: The strategy focuses on maintaining the
current position. The organisation does not change products
or services offered, which means that the same products are
offered to the same customers with the same technology in
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the same market. There is no scope of modification, expan-
sion and diversification in this strategy. However, in today’s
competitive environment, it is difficult to adopt this strategy.
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Therefore, improvisation in customer-base, product technol-
ogy and service quality are acceptable in this strategy.
Expansion strategy: It focuses on growing a business in
terms of customer-base, operations, market share and in-
creased product and services, with the sole objective of in-
creasing the revenue. The expansion strategy is also known
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as growth strategy. An organisation can expand by the fol-

lowing ways:
99 Expansion through concentration: It involves invest-
ment in the existing resources of the organisation for ex-
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pansion.
99 Expansion through integration: It involves integrating
with suppliers or distributors to expand.
99 Expansion through diversification: It involves expand-
ing into a new segment of a related or unrelated product.
Retrenchment strategy: It implies reducing or cutting off. In
this strategy, an organisation reduces products, employees,
investments or assets. Organisations use this strategy when
there is a decline in sales and profits. Using the retrenchment
strategy, the organisation re-organises itself to cope-up with
the challenges, such as reduced demand for organisation’s
product and recession in the economy. In this strategy, the
organisation looks for various options, such as complete busi-
ness liquidation or selling off some part of the business. Vari-
ous retrenchment strategies are given in Table 1.1:

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TABLE 1.1: RETRENCHMENT STRATEGIES

Liquidation Divestment Turnaround Restructur- Downsizing
Strategy Strategy Strategy ing Strategy Strategy
Closing Selling off Reversing Reducing the Decreasing
business and a part or trends in the mix of or- operations
selling off business unit organisation- ganisational and human
the business of the organi- al profits to operations resources of
assets sation stop negative the organisa-
cash flows tion
Combination strategy: It refers to a mixture of two or more
grand strategies. This is the most widely used strategy. For
example, an organisation can use two strategies at the same
time in different departments. This happens when some de-
partments of the organisation are generating less profit in
comparison with other departments. In such situations, in
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one department, employees can be paid according to the
work hours, whereas in another department, employees can
be paid according to the performance.
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5. Choosing the strategy: It refers to evaluating each strategy for
choosing the best optimal strategy. After evaluating all strategies,
a single strategy or combination of two or more strategies is
decided by the strategist. The choice of strategy depends on the
stage of business life cycle and pre-determined objectives.
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self assessment Questions
1. _____________-level strategies help in developing objectives,

allocating resources and coordinating with Strategic Business
Units (SBUs).
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2. A business-level strategy allocates resources among the

functional areas of a business. (True/False)
3. Liquidation, divestment and turnaround are sub-strategies
of:
a. Stability strategy
b. Expansion strategy
c. Retrenchment strategy
d. Combination strategy
Activity
Visit the website of any established company and identify their

corporate-level and business-level strategies. Prepare a short note
based on your findings.

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1.3 CONCEPT OF OPERATIONS STRATEGY

You can define operations strategy as a plan that details how an organ-
isation utilises its resources to achieve goals set by the top manage-
ment. It is a means by which operations implements the organisation’s
corporate strategy and helps to build a customer-driven organisation.
According to Slack and Lewis, 2011, Operations strategy is the total

pattern of decisions, which shape the long-term capabilities of any type of
operation and their contribution to overall strategy, through the
reconciliation of market requirements with operations resources.
Here, the term ‘pattern’ implies a consistency in strategic decisions

and actions over time. Henry Mintzberg, a management guru, also
views the strategy formation process as a ‘pattern in a stream of ac-
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tions’. According to him, strategy is realised through a combination of
deliberate and emergent actions, shown in Figure 1.3:
Intended strategy
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Deliberate
strategy
Realised
strategy
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Unrealised
strategy
Emergent
strategy
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Figure 1.3: Strategy Formation Process

Source: Strategic Management Journal, Mintzberg, H. and Waters, J. ‘Of Strategies, Deliberate
and Emergent’, 1985. © John Wiley & Sons Ltd.
As shown in Figure 1.3, an organisation may have a certain intended

strategy as a set of strategic plans. However, only a few of these in-
tended strategies are realised through a deliberate strategy leaving
others to be remained as unrealised. Usually, strategies that take no
account of operational feasibility linger as an unrealised set of inten-
tions. Apart from this, strategies may also emerge from actions, within
the organisation and over a period of time may form a consistent pat-
tern. Such strategies usually arise from within the operations of the
organisation and therefore, put a major impact on the formation of
organisational strategy.
An operations strategy involves developing the long-term plan for us-

ing major resources of the organisation to achieve the desired corpo-
rate objectives. The plan includes long-term decisions related to ca-
pacity, location, processes, technology and timing.

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Following issues are addressed in the operations strategy:

How the resources should be structured?
What activities should take place?
How to ensure the quality of goods and services?
What type of processes to install for manufacturing goods and ser-
vices?
An operations strategy involves key operations decisions that are

aligned with the overall strategic objectives of an organisation. This
helps an organisation in gaining an edge over its competitors. The fol-
lowing are the basic elements of an operations strategy:
Positioning of the production system
Location of factories and service facilities
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Design and development of products and services
Selection of production technology
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Development of the production process
Effective allocation of available resources
Exhibit
Operations Strategy at IBM

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Source: www.digitaltrends.com
IBM offers Lean Sigma, an international production/service model,

which is considered as a systematic approach to cost reduction and
generate significant savings with an ability to align network capac-
ities with future demands. The operations strategy at IBM aims to
resolve issues, including continuous process improvement, domes-
tic or global sourcing/outsourcing and merger synergy realisation.
An operations strategy services that IBM offers are as follows:

Operating model definition, design and alignment: Select and
implement the most efficient operating model to deliver your
business strategy.

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Operational improvement and efficiency: Reduce costs and

improve output by using appropriate process improvement and
business process management methods, tools and techniques.
Lean Sigma and Green Sigma: Create sustainable competitive
advantage, generate savings, continuously improve productiv-
ity and manage regulatory pressures through environmental
innovation.
Strategic profit improvement: Realign business and operating
strategies, creating a steep change in financial performance.
Innovation and services management: Drive profitable growth
and increase market share.
Globally integrated operations: Increase market share and
compete more formidably by integrating across the enterprise.
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Network and location structure: Align capacities with future
demands for essential business continuation.
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Why IBM
The Global Business Services operations strategy is a leader in

strategy capabilities, including Lean Sigma, collaboration exper-
tise, strong merger integration and change management. Opera-
tions strategy consultants support clients with the efficiency of cur-
rent processes and organisations by developing new structures for
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operations innovation.
With nearly 3,500 strategy professionals worldwide, the IBM Strat-

egy and Change practice is part of IBM Global Business Services,
one of the world’s leading management consulting practices. Work-
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ing across all major sectors, IBM has business expertise across
more than a dozen industries. This includes communications, dis-
tribution, financial services and industrial and public sectors.
1.3.1 OBJECTIVES OF OPERATIONS STRATEGY
An operations strategy aims at taking into account the needs of its

internal customers and suppliers. The two major objectives of opera-
tions strategy is to contribute directly to the achievement of the stra-
tegic objectives of the next hierarchical level and help other business
functions in making their contribution to the organisational strategy.
The major objectives of the operations strategy include:
Improving responsiveness by:
Minimising respond time
Ensuring timely response
Ensuring accessibility through better geographical proximi-
ty, better locations, better logistics and better communication
systems

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Providing a wider product/service choice through flexible op-

erations and enhanced product designs and processing capa-
bilities
Reducing throughput time, cycle times and set-up times
Increasing pro-activity
Reducing prices through:
Overall improvement in the production-delivery value chain
Better designs of products and services
Improving quality by:
Better skills, better knowledge and better orientation of all
production and service providers
Improvement in technology
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Minimising complexity and confusion
Eliminating problem generators
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1.3.2 CONTENTS OF OPERATIONS STRATEGY
Content of the operations strategy determines specific strategies that

govern the day-to-day decision making in operations. In other words,
the content of operations strategy is basically a collection of policies,
plans and behaviours that the operations function aims to pursue.
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The content of the operation strategy involves key strategic decision

areas that should be addressed while developing an operations strat-
egy. The two basic strategic decision areas are concerned with the
‘structure’ and ‘infrastructure’ of operations. The structure-related
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decisions deal with physical attributes of facilities, capacity, process

technology and supply network. On the other hand, decisions related
with infrastructure comprise planning and control, quality, organisa-
tion, human resource, new product development and performance
measurement. Let us discuss major structural decision areas:
Facilities: Facility decisions related to the location, size and alloca-
tion of operational resources. These decisions are concerned with
where to locate the production facility, what goods and services
should be produced at each location, what markets each facility
should serve, what should be the layout of the facility to ensure
smooth production of goods and services, etc.
Capacity: It is concerned with the ability of operations to respond
to changes in the customer demand. Capacity decisions relate
with how to use facilities efficiently by managing shift patterns,
working hours and staffing levels. Capacity decisions are often
affected by the organisation ability to serve a particular market from a
specific location.

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Process technology: Process technology decisions are concerned

with determining the technology used in the operations process. It
includes decisions, such as degree of automation used, configura-
tion of equipment, etc.
Supply network: These decisions relate to determining which op-
erations should be conducted in-house and which should be out-
sourced. It also involves vertical integration decisions, concerned
with the choice of suppliers, their location, level of dependency on
particular suppliers and supplier relationship management.
Structure decisions deal with major capital investments that aim to set
operational direction for upcoming years. These decisions largely im-
pact resources and capabilities of an organisation and affect its potential
output. Structural decisions are not very easy to change as they involve
huge cost in their implementation. Thus, for an organisation, it is easier
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to change its marketing strategy rather than changing its operations
strategy due to its structural decision areas. Due to this reason, these
decisions are considered to be strategic decisions for any organisation.
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Let us now discuss the major infrastructure decision areas:
Planning and control: These infrastructural decisions relate with
systems used for planning and controlling of operations.
Quality:These decisions relate with quality management policies
and practices.
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Work organisation: The decisions, taken in regard with work or-

ganisation, relate with deciding organisational structure, authori-
ty and responsibilities in operations.
Human resource: This infrastructural decision area involves deci-
N
sions related with recruitment and selection, training and develop-

ment, management style, etc. The effectiveness of the operations
strategy of an organisation depends on the skills and efficiency of
its human resource. Therefore, an organisation should focus on
imparting skills and knowledge to its employees from time-to-time
to increase their work efficiency. An organisation that does not
have the right man for the right job at the right time, fails miser-
ably when it comes to the implementation of operations strategy.
New product development: Infrastructural decisions related with
new product development involve deciding the system and proce-
dures, used to design and develop new products and services.
Performance measurement: It includes decisions related with fi-
nancial and non-financial performance management and its asso-
ciation with reward systems.
Infrastructural decisions are also important for any organisation as

they help in the effective implementation of structural decisions. In-
frastructural decisions tend to be more flexible in nature and there-
fore, it is easier to change them in comparison to structural decisions.

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1.3.3 TYPES OF OPERATIONS STRATEGIES
There can be many types of operations strategies, depending upon

the type of the organisation, products produced by the organisation,
organisational structure, location of the organisation, etc. Some of the
important operations strategies are as follows:
Customer-driven strategies: These strategies are driven by the
response of customers, such as customers’ feedback, customers’
demands for new and innovative methods, customisation of the
product, etc. Examples include Fast Moving Consumer Goods
(FMCG) products, which are required to be produced and be avail-
able in large quantities and in large number of places.
Product-driven strategy: It is driven based on product character-
istics, such as the type of the product, characteristics of the prod-
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uct, etc. For example, soft drinks are in high demand during hot
weather and in low demand during the cold weather. In such a
case, the organisations producing soft drinks have to make sure
that during the hot weather, they are able to manufacture drinks
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quickly and cover the extensive market.
Corporate-driven operations strategy: This strategy is drafted
by executive management. All other strategies are formulated and
implemented in accordance with this strategy.
Failure prevention and recovery strategy: This strategy pertains
to recovering damages (either partial or complete) arising because
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of unforeseen circumstances. For example, the recovery strategy in

the case of disaster related to fire, earthquake and computer failure.
Exhibit
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Operations Strategy Examples

RETAIL
Walmart is one of the most successful and largest retailers in the U.S.
history. The operations strategy at Walmart aims at using low inven-
tory levels to generate faster sales based on low prices and value.
Maintaining low inventory allows the company to keep prices low for
its customers. It also helps in replenishing products with new items
once inventory is gone. This also increases demand. High demand
combined with low prices leads to increased sales for Walmart.
Source: www.cnbc.com

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ONLINE
Online merchants typically have very different operations strate-

gies than brick-and-mortar retailers. For example, the operations
strategy for an online merchant involves creating and maintaining
a website that is easy to use and reliable. The major focus of the
operations strategy of online retailers is to enable customers in easy
navigation through the website to make a purchase. An online mer-
chant’s operations strategy puts a lot of emphasis on the design and
usability of the site, which includes product photos and descrip-
tions that attract visitors to make a purchase. The checkout process
also must be easy and fast.
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Source: www.dzineclub.com
B2B
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Business-to-Business (B2B) organisations sell products and ser-

vices to other businesses. It makes their operations strategies dif-
ferent from the operations strategies of retailers, who sell products
and services directly to consumers. An operations strategy for a
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B2B organisation might be to establish a team of industry experts

and thought leaders who can help in dealing with other business
organisations. This is done in a variety of ways, including obtain-
ing speaking engagements at trade shows, publishing articles on
different angles within the industry and expanding the company’s
professional network as much as possible. Organisations that have
a reputation as the experts in a certain industry are more likely to
get business than organisations with no industry reputation.
NON-PROFIT
The ultimate goal of a non-profit organisation is not about making

money. Thus, the operations strategy for a non-profit is different
than a for-profit organisation. Non-profit organisation’s operations
strategies might include fund-raising efforts to pay employee sala-
ries and partnering with local organisations to improve or resolve a
situation. For example, in an area with high population of homeless
people, a non-profit organisation might arise to help the needy with
free meal service.
Source: http://smallbusiness.chron.com/operations-strategy-examples-24650.html

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4. _______________ is a means by which operations implements

the organisation’s corporate strategy and helps to build a
customer-driven organisation.
5. The infrastructure-related decisions deal with physical
attributes of facilities, capacity, process technology and supply
network. (True/False)
6. _____________ of the operations strategy determines specific
strategies that govern the day-to-day decision making in the
operation.
Activity
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Identify the type of operations strategy from the following strate-
gies:
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a. Planning product mix
b. Identifying customer needs and desires
c. Rewarding customers
d. Offering discounts on frequent purchases
e. Innovating product
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OPERATIONS COMPETITIVE
1.4
DIMENSIONS
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For developing an efficient operations strategy, an organisation needs

to identify its competitive dimensions. Cost, quality, time and flexibili-
ty are the main competitive dimensions of an organisation. An organ-
isation may not adopt all the four competitive dimensions together. It
needs to select competitive dimensions that are more feasible for its
goods/services and fit its core competencies. Important competitive
dimensions of an organisation are discussed as follows:
Cost: It is one of the main competitive dimensions of an organ-
isation. Most organisations adopt a cost-leadership strategy that
aims at producing standardised products and selling them at low
prices. An organisation that adopts a cost-leadership strategy at-
tempts to reduce its economic costs below its competitors for gain-
ing a competitive advantage. An organisation can reduce its costs
by eliminating the wastage of materials, emphasising on efficient
processes and limiting the product range. Some factors to be kept
in mind while formulating the strategy related to the cost aspect
are as follows:
How should an organisation carry out price mechanism, that
is, should the prices be kept low with respect to competitors?

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Should the organisation put a limit or a cap on the price of

products so that it does not affect the overall profit scenario?
Should the organisation go for automation to reduce the cost
of processing products or should it deploy low-wage labour?
Quality: The main aim of an organisation is to achieve a high level
of customer satisfaction by providing high-quality goods and ser-
vices. Quality is all about reducing the number of defects in prod-
ucts or meeting the specified value standards of an organisation.
For maintaining a high level of quality, an organisation should de-
termine the expectations of its customers towards the quality of a
good or service and make the required effort to meet those expec-
tations. The following factors are considered while formulating a
strategy related to quality dimensions:
What should be the minimum acceptable quality of the prod-
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ucts?
What processes need to be developed, implemented or en-
hanced for providing customers with the quality acceptable to
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them?
What needs to be done to improve the quality of the products?
An organisation can ensure the quality of its products with the
help of the following ways:
Improving the design and features of goods
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Adopting the most appropriate manufacturing process

Procuring high-quality inputs
Having an efficient machinery and a modern plant needed for
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manufacturing
Having efficient human resource
Time: Organisations focus on the timely delivery of products to
get an edge over their competitors. Time acts as the most crucial
strategic tool adopted by an organisation to achieve a competitive
edge in the market. For example, Domino’s adopts a strategy of
delivering pizzas in 30 minutes. In case, the delivery of pizza is
late, the organisation provides pizzas free of cost. Nowadays, or-
ganisations are concerned about introducing their products in the
market before their competitors. Organisations need to consider
the following factors while considering a competitive advantage
related to time:
At what time should the product be introduced in the market
to gain advantage with respect to competitors?
How to reduce delays while delivering the product?
Flexibility: It refers to the capability of an organisation to respond
to changes in situations with respect to product improvement and

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innovation. Nowadays customers prefer to purchase more custom-

ised products. Organisations that are able to provide customised
products get a competitive advantage in the market. Therefore,
organisations need to be flexible enough to increase or decrease
the quantity of products for meeting market demand.
1.4.1 CORPORATE STRATEGY DESIGN AND

COMPETITIVENESS
An organisation selects a competitive dimension that is feasible for its

goods/services and fits its core competencies. Based on that compet-
itive dimension, corporate strategies are designed. Here, the key ele-
ment in managing competitiveness is an adequately formulated cor-
porate strategy. The corporate strategy, in order to eliminate the gap
between potential and real performances of business activities, aims
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at developing efficient business mission and corporate objectives with
respect to the current market environment. This helps in developing
an adequate relation between the market environment and organisa-
tional resource possibilities.
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The corporate strategy is designed as a pattern of decisions that de-
termines an organisation’s corporate objectives, principal policies and
plans to achieve those objectives and policies. A successful corporate
strategy gives an overall direction towards organisational growth by
managing businesses and product lines. It defines approaches that an
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organisation needs to take to attract customers, withstand competi-

tive pressure and improve market position. Corporate strategies can
be applied to create a competitive advantage by developing unrivalled
competencies, such as marketing and design.
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Corporate strategies need to be organised to be effective in a competi-

tive environment. It could be done by co-ordinating the organisation’s
overall goals with its core processes. Corporate strategies determine
the market that the organisation intends to serve and the responses
that the organisation will make to change the environment. For ex-
ample, a corporate strategy determines resources that could help an
organisation in developing core competencies and core processes,
which the organisation could employ in the international market.
Based on the corporate strategy, market analysis is done to identify an

organisation’s target customers, their needs and the strengths of the
competitor. This information is used in developing capabilities that
the organisation needs to develop. These capabilities help the organi-
sation in developing products/services and processes that are needed
to be competitive in the market.
Thus, the corporate strategy provides an overall direction for carrying

out all the organisation’s functions to achieve competitiveness. Com-
petitiveness can be defined as an ability of an organisation to offer
products/services that meet the quality standards of the market at

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prices that are at par with other organisations in the market and pro-
vide adequate returns on investment to the organisation in producing
them. Competitiveness cannot be achieved merely by developing cor-
porate strategies. These strategies can provide a direction, but achiev-
ing competitiveness is a process. It requires real-time implementation
of corporate strategies to produce and sell products/services that can
compete with competitor’s products/services based on lower cost,
higher quality, superior services or similar attributes.
7. Cost, quality, time and flexibility are the main ___________

dimensions of an organisation.
8. Competitiveness cannot be achieved only by developing
corporate strategies. (True/False)
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Activity
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Take an example of a Multi-national Company (MNC). Using the
Internet, identify how its corporate strategies create a competitive
advantage by developing competencies in areas, such as marketing
and design. Prepare a report on it.
OPERATIONS STRATEGY –
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1.5
FORMULATION AND SUPPORT
An operations strategy aims at linking various short-term and long-
term operations decisions to the corporate strategy and develops ca-
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pabilities in which an organisation needs to be competitive. The op-

erations strategy is formulated by following a process that defines the
way of designing strategies. It reflects what the operations managers
should do and what they actually do in practice. The operations strat-
egy formulation process can be understood with the help of a series of
steps, which are shown in Figure 1.4:
Understand the competitive dynamics at the marketplace
Identify order-qualifying and order-winning attributes
Identify strategic options for sustaining a competitive advantage
Devise the overall corporate strategy
Arrive at the operations strategy
Figure 1.4: Operations Strategy Formulation Process

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Let us now discuss the steps involved in the operations strategy for-
mulation process in detail:
1. Understand the competitive dynamics at the marketplace: The
formulation of an operations strategy begins with scanning the
marketplace and understanding its dynamics. This helps the
organisation in understanding the issues that it must consider
while formulating its operations strategies. It involves detailed
analysis of current market structure, existing competitors
and their offerings and the competition intensity level. The
analysis helps an organisation to identify which aspects of its
products/services can provide it a competitive advantage over
its competitors. For example, Tata Motors analysed the market
and identified that there is a scope for the development of an
affordable car that would appeal to many Indians who ride
motorcycles. Market analysis led the company to launch the
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‘Tata Nano’ car with a price of `100,000.
While analysing the marketplace, the organisation must be aware
of the dynamic expectations of customers that keep changing with
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time. Technological improvement and infrastructural growth
may cause a shift in customer’s expectations about a product/
service. Thus, organisations should prioritise their alternatives
in a manner that could help it to deal with the dynamic nature of
the marketplace.
2. Identify order-qualifying and order-winning attributes:
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Analysis of the competitive dynamics leads the organisation to

identify the order-qualifying and order-winning attributes for
a product/service that it is offering. Order-qualifying attributes
refer to the set of attributes that a customer expects in a product/
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service while considering to purchase it. The absence of any of

these attributes may make the customer not to buy the product/
service. However, the mere presence of these attributes does not
guarantee that the customer will buy the product/service. The
order-qualifying attributes only indicate the qualifying level of
a product/service for purchase consideration. Let us take the
example of a smartphone. Internet and networking features are
one of the basic order-qualifying attributes for a smartphone. You
would not buy a smartphone if it does not provide these features.
However, mere presence of these features may not guarantee
that you would purchase the smartphone.
There should be some other attributes with potential to appeal
customers to buy the product/service and provide a better value
for money. Such attributes that motivate the customers to buy a
product/service are called order-winning attributes. The presence
of order-winning attributes helps customer’s to differentiate a
product/service from competitor’s offerings. In addition, it also
favourably influences the customer’s buying decision in favour
of the product/service. The more the number of such attributes

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in a product/service, the greater is the chance of a customer

to buy the product/service. For example, speedy wireless
connectivity; ubiquitous and automatic Wi-Fi; fingerprint sensor,
optical- or voice-based security; inductive wireless charging; etc.
are some order-winning attributes that may appeal you to buy a
smartphone.
3. Identify strategic options for sustaining competitive
advantage: At this stage, the organisation must identify the
order-winning attributes of its products/services and try to
sustain them for a competitive advantage. The order-qualifying
and order-winning attributes give a set of strategic options that
may help the organisation in sustaining a competitive advantage.
Strategic options are action-oriented responses to the external
situation that an organisation faces. Organisations require to
analyse and weigh each strategic option, and select the most
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suitable one to achieve the competitive advantage. With the help
of these strategic options, the organisation may perform better
and provide high-quality products/services to its customers.
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4. Devise the overall corporate strategy: Organisations may
not use all strategic options available to them. This could be
due to the limited availability of resources and constraints.
Thus, it is required to match available strategic options (for
sustaining the competitive advantage) with available resources
and constraints. This leads the organisation to select the most
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appropriate strategic option. Based on the selected strategic

option, the organisation should develop a strategic plan to
fulfil organisational objectives by taking into consideration the
strengths and weaknesses of the organisation. This results into
the development of the overall corporate strategy. The corporate
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strategy specifies the business that the organisation will pursue;

examines new opportunities and threats in the environment and
identifies growth objectives. It provides an overall direction for
carrying out all the organisation’s functions.
5. Arrive at the operations strategy: Once the corporate strategy
is developed, it serves the basis for the operations strategy. In
other words, the operations strategy specifies the way through
which operations implement the corporate strategy. Suppose, the
corporate strategy of an organisation is to provide low-cost goods,
the choices made as the operations strategy must be consistent
with the overall corporate strategy. To reduce cost, operations
strategies may focus on producing in large capacities to exploit
scale economies or designing the low-cost procurement and
supply chain activities to get economy suppliers for continuous
cost reduction of input materials.
The operations strategy may also focus on continuous cost-improve-

ment, productivity maximisation and cost control by planning and
control activities and thereby reducing the overall cost. Thus, opera-

n o t e s
tions strategy paves the way for achieving the corporate strategy. Ar-
riving at an appropriate operations strategy can help an organisation
to develop capabilities that an organisation needs to achieve its corpo-
rate strategies.
The process of operations strategy formulation helps in generating a

specific course of actions for running the operations system and there-
by, providing an operational excellence and competitive advantage to
an organisation. Besides the efficient operations strategy formulation,
an organisation requires a strong support process for the effective im-
plementation of operations strategies. The support process provides
vital resource and input to support the core process (implementation
of operations strategies). The formulation and implementation of an
operations strategy may get support from accounting, finance, human
resource, marketing and Management Information Systems (MIS).
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The human resource function provides support processes by recruit-
ing skilled workforce to properly execute their assigned responsibil-
ities. The accounting function support process keeps track of the or-
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ganisation’s financial resources. The MIS support process helps in the
processing and movement of information and data to make business
decisions. The marketing support process performs market research,
devices a marketing plan and involves product development. Thus,
you can see that all of these support processes help in implementing
the operations strategy to create value for the organisation and its cus-
tomers.
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9. The ___________ of operations strategy consists of a process

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that defines the way of designing strategies.

10. Order winning attributes refer to the set of attributes that a
customer expects in a product/service while considering to
purchase it. (True/False)
11. The presence of _____________ attributes helps customers to
differentiate a product/service from competitor’s offerings.
Activity
Take an example of a product/service. List its order-qualifying and

order-winning attributes.
STRATEGIC FIT – FITTING OPERATIONAL

1.6
ACTIVITIES TO STRATEGY
A strategic fit occurs when organisations design their internal opera-
tions in accordance with their external environment. In other words,

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strategic fit creates a long-term match between internal operations

and the external environment. Organisations create a strategic fit to
fulfil the demands of its target customers by ensuring an effective use
of resources.
Let us understand the concept of strategic fit with the help of an ex-
ample. Rate the market demand/environment demand for a product
and organisation’s actual performance on a scale of 0 to 100. Now, if
the market demand is 30 and the organisation’s actual performance is
also 30, then there is a perfect strategic fit. If the organisation’s actual
performance is lower than 30, it is not meeting the market demand
and in such a case, there would be a risk that competitors will move to
give better customer satisfaction. Now, if the organisation’s actual per-
formance is more than 30, it is exceeding the market demand and is
probably wasting resources. This situation denotes that internal oper-
S
ations are not being used to capacity and resources are being wasted.
Figure 1.5 shows the strategic fit:
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Line of
100 perfect
strategic fit
A – inadequate
performance Y
Environmental demand
Likely movement
over time
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Increasingly
demanding
environment
X
30
Improving
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performance B – excessive
performance
0 30 100
Level of actual performance
Figure 1.5: Strategic Fit
In Figure 1.5, the market/environmental demand is moving upwards

as customers are becoming more demanding over time. Organisa-
tions, in order to maintain an advantage over the long run, require
looking for continuous improvement and moving towards right on the
horizontal axis. This would result in a long-term movement up the
diagonal (from point X to point Y).
Strategic fit operations aim at satisfying the market view (making prod-
ucts that customer want) by satisfying the resources view (efficient
utilisation of resources). Sometimes these two views can be balanced
and satisfied equally by same operations. For example, if products are
manufactured with no defects, customers may get high quality prod-

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ucts and operating costs can also be kept low. This will satisfy both,
the market view and the resource view. However, often, the two views
cannot be satisfied as they give different requirements. For example,
customers usually demand a distinctive range of products, tailored to
their specific needs. On the other hand, manufacturers may prefer
a long production run of a standard product. Thus, fulfilling the re-
quirements of both the views can be tricky for an organisation.
In the strategic fit, an operations strategy has a long-term concern for

how to determine and develop operational resources that could build
a high degree of compatibility between these resources and corporate
business strategy. In other words, an operational strategy in strategic
fit focuses on fulfilling customer needs that the corporate strategy tar-
gets to fulfil. For instance, an organisation’s corporate strategy concen-
trates on attracting customers by offering them low-priced products.
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To achieve this, an organisation must make sure that its operational
capabilities can support its corporate strategy.
To achieve the strategic fit, the operations strategy configures major

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resources of operations management in a manner that could help in
achieving the organisation’s corporate objectives. Some issues of rele-
vance include taking decisions regarding location, capacity, processes,
technology, etc. In addition, the operations strategy must also inte-
grate with other functions at the corporate level to strengthen corpo-
rate objectives.
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The strategic fit is achieved when operational resources are com-

pletely aligned with corporate objectives. According to Nigel Slack
and Michael Lewis, operations strategy is the total pattern of decisions
which shape the long-term capabilities of any type of operations and
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their contribution to the overall strategy, through the reconciliation of

market requirements with operations resources.
Thus, in order to achieve strategic fit, an organisation requires taking

a number of operations decisions based on operations capability of
plant and match corporate requirements with operational resources.
1.6.1 BASIC UNDERSTANDING OF LEARNING CURVE
Most organisations learn and improve over time by performing a task

again and again and by learning how to perform it more efficiently.
This ultimately increases the organisational efficiency in performing
a task.
Learning curve is a graphical representation of the increase of learn-

ing with experience. Learning curves are based on the principle that
people and organisations become better at performing tasks if tasks
are repeated. This in turn helps in reducing the time to produce a
unit that a person or organisation produces. A learning curve graph is
shown in Figure 1.6:

n o t e s
Cost/time per repetition
0 Number of repetitions (volume)
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Figure 1.6: Learning Curve Graph
Source: T. P. Wright, “Factors Affecting the Cost of Airplanes,” Journal of the Aeronautical
Sciences (February 1936).
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The graph (shown in Figure 1.6) displays the labour hour per unit ver-
sus the number of units produced. It states that time per repetition
decreases as the number of repetitions increases. In other words, it
can be said that the time required in completing each subsequent unit
decreases. This happens because people/organisations learn from
repetition and learning helps them to produce more efficiently.
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The concept of learning curve was initially presented in a report by

T.P. Wright of Curtis-Wright Corp. in 1936. Wright explained how di-
rect labour costs of making a particular airplane reduced with learn-
ing. Learning curves have since been used not only to labour cost but
also to a variety of costs related with material and purchase mecha-
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nisms. A learning curve plays a major role in taking various strategic

decisions regarding employment levels, costs, capacity and pricing.
According to the learning curve principle, when the production dou-

bles, a decrease in time per unit affects the rate of the learning curve.
So, if the learning curve is at an 80% rate, the second unit takes 80% of
the time, the fourth unit takes 80% of the time of the second unit, the
eighth unit takes 80% of the time of the fourth unit, and so forth. This
principle is shown as:
T × Ln = Time required for the nth unit
Where,
T = unit cost or unit time of the first unit
L = learning curve rate
n = number of times T is doubled
If the first unit of a particular product took 20 labour-hours, and if an

80% learning curve is present, the hours the fourth unit will take re-
quire doubling twice- from 1 to 2 to 4. Therefore, the formula is:
Hours required for unit 4 = 20 × (0.8)2 hours = 12.8 hours

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Let us now discuss major mathematical approaches to solve learning

curve problems:
ARITHMETIC APPROACH
Arithmetic approach is the simplest approach to solve learning curve

problems. As you know that when the production doubles, labour per
unit declines. This happens because the people/organisation learns
from repetition and this learning works to make production more ef-
ficient. So, if we know that the learning rate is 80% and that the first
unit produced, took 100 hours, the hours required for producing the
second, fourth, eighth, and sixteenth units would be:
Nth Unit Produced Hours for Producing Nth Unit

1 100.0
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2 80.0 = (.8 × 100)
4 64.0 = (.8 × 80)
8 51.2 = (.8 × 64)
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16 41.0 = (.8 × 51.2)
LOGARITHMIC APPROACH
The logarithmic approach allows you to determine labour for any unit,
TN, by the formula:
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TN = T1(Nb)
Where;
TN = Time for the Nth unit
N
T1= Hours to produce the first unit

b = (log of the learning rate)/(log 2) = slope of the learning
curve
Some values for b are shown in Table 1.2:
TABLE 1.2: LEARNING CURVE VALUES OF ‘b’

Learning Rate (%) b
70 –0.515
75 –0.415
80 –0.322
85 –0.234
90 –0.152
Now, if the learning rate for an operation is 80% and the first unit of
production took 100 hours, the time required to produce the third unit
would be:
TN = T1 (Nb)

n o t e s
T3 = (100 hours) (3b)
= (100) (3log .8/ log2)
= (100) (3-0.322)
= 70.2 hours
LEARNING CURVE COEFFICIENT APPROACH
The learning curve coefficient approach uses the following equation:
TN = T1C
Where;
TN = number of labour-hours required to produce the Nth unit
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T1 = number of labour-hours required to produce the first unit
C = learning curve coefficient

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The learning curve coefficients, where coefficient C = N(log of learning rate/
are shown in Table 1.3:
log2)
TABLE 1.3: LEARNING CURVE COEFFICIENTS

Unit Unit Total Unit Total Unit Total Unit Total Unit Total
Number Time Time Time Time Time Time Time Time Time Time
M
(n) Time
1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
2 .700 1.700 .750 1.750 .800 1.800 .850 1.850 .900 1.900
3 .568 2.268 .634 2.384 .702 2.502 .773 2.623 .846 2.746
N
4 .490 2.758 .562 2.946 .640 3.142 .723 3.345 .810 3.556
5 .437 3.195 .513 3.459 .596 3.738 .686 4.031 .783 4.339
6 .398 3.593 .475 3.934 .562 4.299 .657 4.688 .762 5.101
7 .367 3.960 .446 4.380 .534 4.834 .634 5.322 .744 5.845
8 .343 4.303 .422 4.802 .512 5.346 .614 5.936 .729 6.574
9 .323 4.626 .402 5.204 .493 5.839 .597 6.533 .716 7.290
10 .306 4.932 .385 5.589 .477 6.315 .583 7.116 .705 7.994
11 .291 5.223 .370 5.958 .462 6.777 .570 7.686 .695 8.689
12 .278 5.501 .357 6.315 .449 7.227 .558 8.244 .685 9.374
13 .267 5.769 .345 6.660 .438 7.665 .548 8.792 .677 10.052
14 .252 6.026 .334 6.994 .428 8.092 .539 9.331 .670 10.721
15 .248 6.274 .325 7.319 .418 8.511 .530 9.861 .663 11.384
16 .240 6.514 .316 7.635 .410 8.920 .522 10.383 .656 12.040
17 .233 6.747 .309 7.944 .402 9.322 .515 10.898 .650 12.690
18 .226 6.973 .301 8.245 .394 9.716 .508 11.405 .644 13.334
19 .220 7.192 .295 8.540 .388 10.104 .501 11.907 .639 13.974
20 .214 7.407 .288 8.828 .381 10.485 .495 12.402 .634 14.608

n o t e s
Unit Unit Total Unit Total Unit Total Unit Total Unit Total
Number Time Time Time Time Time Time Time Time Time Time
(n) Time
25 .191 8.404 .263 10.191 .355 12.309 .470 14.801 .613 17.713
30 .174 9.305 .244 11.446 .335 14.020 .450 17.091 .596 20.727
35 .160 10.133 .229 12.618 .318 15.643 .434 19.294 .583 23.666
40 .150 10.902 .216 13.723 .305 17.193 .421 21.425 .571 26.543
45 .141 11.625 .206 14.773 .294 18.684 .410 23.500 .561 29.366
50 .134 12.307 .197 15.776 .284 20.122 .400 25.513 .552 32.141
The learning-curve coefficient C depends on both the learning rate

(70%, 75%, 80%, and so on) and the unit of interest. Let us take an
example to understand how the learning curve coefficient approach
helps in solving learning curve problems.
S
Illustration
Ryan shipyard took 155,000 labour-hours to produce the first unit of

IM
chemical tankers that you expect to purchase for your shipping com-
pany. Unit two and three have been produced by the Ryan shipyard
with a learning factor of 80%. At $50 per hour, what should you expect
to pay for the fourth unit? Also mention the suitable approach to solve
the problem.
Solution
M
The learning curve coefficient approach could be used to solve the

problem. Check Table 1.3 for the fourth unit and a learning factor of
80%. The learning-curve coefficient C is 0.640. The labour-hours to
produce the fourth unit can be calculated as:
N
TN = T1C
T4 = (155,000 hours) (0.640)
= 99,200 hours
To find the cost, multiply the labour-hours by $50:
99,200 hours × $50 per hour = $4,960,000
12. ____________ is achieved when the operational resources are

completely aligned with the corporate objectives.
13. According to the learning curve principle, when the production
doubles, the increase in time per unit affects the rate of the
learning curve. (True/False)

n o t e s
Activity
Suppose the learning rate for a particular operation is 85%, and

the first unit of production took 100 hours. Using the logarithmic
approach calculate how many hours would be required to produce
the fourth unit?
REVISING AND UPDATING THE

1.7
OPERATIONS STRATEGY
A strategy should not be static in nature. It should be dynamic and
flexible to adhere to the needs of the business, the global scenario and
various other factors that affect the functioning of the organisation.
Every organisation has to revise and update its strategy for accom-
S
modating the required changes and staying ahead of the competition.
If any strategy of an organisation is changed, this change should be

IM
transmitted to the operations strategy. For example, if an organisation
changes its strategy from being low-priced, made-to-stock products to
high-priced or made-to-order products, the operations strategy must
incorporate this change.
Changes in strategies are not sudden. They often result from com-
prehensive and well-thought revision and updating of strategic plans.
M
Some organisations revise their operations strategic plans every year,

while some take three to five years to revise and update the same.
There are various reasons that enforce an organisation to revise and
update their operations strategic plans. Change in technology, legisla-
tion, leadership style, work objectives, organisational culture, etc. are
N
some major reasons behind revising and updating operations strate-

gic plans.
The operations strategic plans are used as a measurement tool for

measuring organisational health and standing within the industry.
Due to the importance and far-reaching effects of strategic plans, it is
necessary to revise and update them at planned intervals. The revi-
sion and updating of operations strategic plan involves reviewing the
current strategies or departments (linked to the revised strategies) to
ensure that shared resources and work flow have not been affected.
In addition, any revisions or updates are required to check whether
the resources are still adequate to meet the demands and the set goals
are still achievable and realistic. Usually, the revision and updating of
operations strategic plan is needed to:
Review the previous years’ gains and misses and to set goals for
the new plan
Review the historical data for resources and set new requirements
Update (as needed) any legal requirements within the plan

n o t e s
List the latest industry trends and technological progresses

Check on competitors to see what’s new with them
After making necessary revision and updating, an organisation needs

to check whether the planned improvement in the operations stra-
tegic plans meet expectations. If the answer is no, further revisions
should be made to ensure the revision and update was adequate. The
organisation can identify the gap by:
Comparing actual plan with projected results
Comparing estimated timetables with documented completion
dates
Grading the plan on whether it is on time and target
S
Exhibit
Sample strategic questions to ask when revising and updating

an operations strategic plan
IM
Has the mission changed?
Are any new goals implemented?
Has the organisation taken on any new responsibilities that af-
fect the existing goals?
Has the organisation’s finances dramatically changed and af-
M
fected the budget?

Has the organisation procedures changed either through regu-
lations and guidelines or through improved innovation?
N
Have audits turned up repeated or significant negative find-

ings?
Is there any new legislation affecting the organisation?
Are there any new watch groups focusing on the organisation
or its products?
Have there been any economic or other external shifts that
could affect the organisation?
Has a major competitor moved into the area?
If goals are being greatly exceeded, should they be raised?
Goals that are not being met, should they be revised or are other
changes needed? What is the cause behind the failure?
Are there enough execution indicators built-in to the tactics to
chart progress and flag management when changes are need-
ed?

n o t e s
14. The revision and updating of operations strategic plan is

needed to:
a. Review the previous years’ gains and misses and set goals
for the new plan
b. Review the historical data for resources and set new re-
quirements
c. Update (as needed) any legal requirements within the plan
d. All of the above
Activity
S
Using the Internet, identify how increased automation in produc-
tion and operations system is compelling automobile companies
to revise and update their operations strategic plans. Take any au-
IM
tomobile company as an example to explain your answer. Write a
short note on it.
1.8 SUMMARY
A strategy is a plan of actions, which provides direction to achieve
M
a set of pre-determined and specific goals.

The three levels of strategy are corporate level, business level and
functional level.
N
An operations strategy refers to the strategy formulated for an ef-

fective working of the operations functions of an organisation.
Without a sound operations strategy, no organisation can survive
in the market.
Content of the operations strategy determines specific strategies
that govern the day-to-day decision making in the operation.
The two basic strategic decision areas are concerned with the
‘structure’ and ‘infrastructure’ of operations.
Some important operations strategies are:
Customer-driven strategies
Product-driven strategy
Corporate-driven operations strategy
Failure prevention and recovery strategy
Important competitive dimensions of an organisation are:
Cost
Quality

n o t e s
Time
Flexibility
An organisation selects a competitive dimension that is more fea-
sible for its goods/services and fits its core competencies. Based on
that competitive dimension, the corporate strategies are designed.
A corporate strategy provides an overall direction for carrying out
all the organisation’s functions to achieve competitiveness.
Competitiveness can be defined as the ability of an organisation to
offer products/services that meet the quality standards of the mar-
ket at prices that are competitive and provide adequate returns on
investment to the organisation in producing them.
An operations strategy aims at linking various short-term and
long-term operations decisions to corporate strategy and develops
S
the capabilities that an organisation needs to be competitive.
The steps involved in the operations strategy formulation process
include:
IM
1. Understanding the competitive dynamics at the marketplace
2. Identifying order-qualifying and order-winning attributes
3. Identifying strategic options for sustaining competitive
advantage
4. Devising the overall corporate strategy
M
5. Arriving at the operations strategy

Besides efficient operations strategy formulation, an organisation
requires strong support process for effective implementation of
operations strategies. The support process provides vital resource
N
and input to support the core process (implementation of opera-

tions strategies).
A strategic fit occurs when an organisation designs its internal op-
erations in accordance with their external environment.
To achieve the strategic fit, the operations strategy configures the
major resources of operations management in a manner that could
help in achieving the organisation’s corporate objectives.
Learning curve is a graphical representation of the increase of
learning with experience.
Learning curves are based on the principle that people and organ-
isations become better at performing tasks, if the tasks are repeat-
ed.
The major mathematical approaches to learning curve problems
involve:
Arithmetic approach
Logarithmic approach
Learning curve coefficient approach

n o t e s
Everyorganisation should revise and update its strategy for ac-

commodating the required changes and for staying ahead of the
competition.
key words
Automation: The use of computers and other automated ma-

chinery to execute business-related tasks.
Business to Business (B2B): Any transaction of products or
services that occur between two business entities.
Capacity: Ability to produce a particular number of units at a
given time.
Competitive edge: The strategic lead that an organisation has
over its competitor within the same industry.
S
Liquidation: A process where a business or organisation de-
clares itself bankrupt and its assets are sold out to pay the cred-
itors.
IM
Quality: A standard measure of how well a product or service
conforms to the specified standards to meet the requirements
of the customers.
1.9 DESCRIPTIVE QUESTIONS

M
1. Define operations strategy. Discuss major objectives of operations

strategy.
2. Write a short note on the content of the operations strategy.
N
3. Discuss how an adequately formulated corporate strategy helps

in managing competitiveness.
4. Write a short note on strategic fit.
5. Discuss why knowledge of learning curve is important for an
organisation. Also explain major mathematical approaches to
learning curve problems.
6. Explain why an organisation requires revising and updating
their operations strategic plans.
1.10 ANSWERS AND HINTS

ANSWERS FOR SELF ASSESSMENT QUESTIONS
Topic Q. No. Answers

Concept of Strategy 1. Corporate
2. True
3. c. Retrenchment strategy

n o t e s

Concept of Operations 4. Operations strategy
Strategy
5. False
6. Content
Operations Competitive 7. Competitive
Dimensions
8. True
Operations Strategy – 9. Formulation
Formulation and Support
10. False
11. Order-winning
S
Strategic Fit – Fitting 12. Strategic fit
Operational Activities to
Strategy
13. False
IM
Revising and Updating the 14. d. All of the above
Operations Strategy
HINTS FOR DESCRIPTIVE QUESTIONS

1. Operations strategy can be defined as a plan that details how
M
an organisation utilises its resources to achieve the goals set by

the top management. Operations strategy aims at taking into
account the needs of its internal customer and suppliers. Refer
to Section 1.3 Concept of Operations Strategy.
N
2. The content of operations strategy is basically a collection of

policies, plans and behaviours that the operations function aims
to pursue. Refer to Section 1.3 Concept of Operations Strategy.
3. Corporate strategy provides an overall direction for carrying out
all the organisation’s functions to achieve competitiveness. Refer
to Section 1.4 Operations Competitive Dimensions.
4. A strategic fit occurs when organisation designs its internal
operations in accordance with their external environment. Refer
to Section 1.6 Strategic Fit – Fitting Operational Activities to
Strategy.
5. Learning curves are based on the principle that people and
organisations become better at performing tasks, if the tasks are
repeated. This in turn helps in reducing the time to produce a
unit that a person or organisation produces. Refer to Section
1.6 Strategic Fit – Fitting Operational Activities to Strategy.
6. There are various reasons that enforce an organisation to
revise and update their operations strategic plans. Change

n o t e s
in technology, legislation, leadership style, work objectives,

organisational culture, etc. are some major reasons for revising
and updating operations strategic plans. Refer to Section
1.7 Revising and Updating the Operations Strategy.
1.11 SUGGESTED READINGS & REFERENCES
SUGGESTED READINGS
Slack, N., & Lewis, M. (2011). Operations Strategy (1st ed.). Harlow
[u.a.]; Munich: Pearson.
Waters, C. (2006). Operations Strategy (1st ed.). London: Thomson.
Heizer,J. & Render, B. (2001). Operations Management (1st ed.).
Upper Saddle River, N.J.: Prentice Hall.
S
Kale,
S. (2013). Production and Operations Management (1st ed.).
New Delhi: McGraw Hill Education (India).
IM
E-REFERENCES
5 Core Operational Strategies. (2017). Smallbusiness.chron.
com. Retrieved 22 May 2017, from http://smallbusiness.chron.
com/5-core-operational-strategies-15488.html
Rao, S. (2017). Operations strategy is a key element in corporate
M
strategy. Citeman.com. Retrieved 22 May 2017, from http://www.

citeman.com/2112-operations-strategy-is-a-key-element-in-corpo-
rate-strategy.html
Revising and Updating the Strategic Plan. (2017). UniversalClass.
N
com. Retrieved 22 May 2017, from https://www.universalclass.com/

articles/business/revising-and-updating-the-strategic-plan.htm
Strategic Fit The Concept. (2017). drypen.in. Retrieved 22 May 2017,
from http://www.drypen.in/featured-articles/strategic-fit-the-con-
cept.html
Strategic Management: Learning Curves. (2017). Tools-and-tech-
niques.24xls.com. Retrieved 22 May 2017, from http://www.tools-
and-techniques.24xls.com/en104
What is Corporate Strategy? - Definition | Meaning | Example.
(2017). My Accounting Course. Retrieved 22 May 2017, from http://
www.myaccountingcourse.com/accounting-dictionary/corpo-
rate-strategy

N
M
IM
S
C h a
2 p t e r
DESIGNING OPERATIONS STRATEGY
CONTENTS
S
2.1 Introduction
2.2 Approaches to Design Operations Strategy
IM
2.2.1 Adjust the Current Strategy
2.2.2 Top-down Approach
2.2.3 Bottom-up Approach
Activity
2.3 Steps in Strategy Design Process
M
2.3.1 Assess the Current Strategy

2.3.2 Define the Purpose of Operations
2.3.3 Analyse the Operations Environment
2.3.4 Analyse Internal Operations
N
2.3.5 List Alternative New Operations Strategies

2.3.6 Evaluate Alternatives and Choose the Best
2.3.7 Add Details to the Chosen Strategy
2.3.8 Implement the Strategy
Activity
2.4 Defining the Purpose of Operations
2.4.1 Designing the Operations Mission
2.4.2 Designing Goals and Objectives of Operations
Activity
2.5 Focused Operations Strategy
2.5.1 Focus on Cost
2.5.2 Focus on Product Differentiation
2.5.3 Focus on Niche or Specialised Products
2.5.4 Focus on Material Management
2.5.5 Focus on Timing

CONTENTS
2.5.6 Focus on Productivity Improvement

2.5.7 Focus on Human Resource Management
2.5.8 Focus on Other Factors
2.5.9 Benefits and Drawbacks of Focused Operations Strategy
Activity
2.6 Summary
S
IM
M
N

DESIGNING OPERATIONS STRATEGY 43
n o t e s
THE GOOGLE WAY OF FOCUSING ON HUMAN RESOURCE
Source: www.bostinno.streetwise.co
S
Headquartered in California, US, Google Inc. is a multinational
technology-based company specialised in Internet-related prod-
ucts and services. When it comes to the focus on human resource
IM
management, it can be stated without doubt that Google stands
out from the rest. The company is reckoned as the “Best Com-
pany to Work For” by Fortune Magazine and the Great Place to
Work Institute.
According to Karen May, the VP of People Development, Google,

M
“Imagine a world where most organisations were the best place to

work. Imagine what we could be getting done on the planet if it were
true.”
There are not many companies who have been able to succeed in
N
having such a deep impact on human life in a short period of time

as Google. Google has grown from a two person start-up to an
organisation with over 50,000 employees spread across the globe.
This expansion is noteworthy and makes one ponder what helped
Google to build such an integrated and successfully managed
workforce.
Google pampers its employees with various facilities, such as

bowling alleys, billiard tables, free haircut during work hours,
free food, gym memberships and even Wi-Fi-fitted shuttle rides to
work. This is simply the employee-focused strategy that enabled
Google to gain competitive leadership in the global market.
Let us discuss the major highlights of employee-focused strate-

gies followed by Google:
Provide continuous trainings: Google aims to achieve maxi-
mum employee satisfaction by listening to their concerns. In
order to make smarter decisions regarding training and many
other work-related issues, Google conducts two broad surveys

n o t e s
of its employees per year. These surveys help Google to under-

stand the training needs of the employees and provide best
measures to cultivate talent.
Make it a great place to work: In its early days, the found-
ers of Google, Larry Page and Sergey Brin, had set a vision of
making Google a truly great place to work. For this, they iden-
tified organisations which are known as the best work places
in terms of caring for people, driving extraordinary innova-
tion and building truly remarkable brands.
S
IM
Source: www.designboom.com
M
The organisation which acted as Google’s role model was SAS

Institute which still ranks as the best multinational compa-
ny to work for as per the Great Place to Work Institute. Goo-
gle understood that people remain loyal to their organisation
only when they gain support and are considered valuable by
N
the organisation. This thought led Google to introduce vari-

ous benefits and perks for employees. The employee-focused
strategies were built on the pillars of trust, transparency and
inclusion. In the process of achieving employee job-satisfac-
tion, Google did not seek competitive advantage as much as
it was trying to ensure its own sustainable success. According
to Karen May, “it’s less about the aspiration to be number one
in the world, and more that we want our employees and future
employees to love it here, because that’s what’s going to make us
successful.”
Promote inspiring work: For years, leaders in Google have
provided the employees an opportunity to devote up to 20% of
their workweek to a project of their choice. For example, few
years ago, an engineer Chade-Meng Tan decided to achieve
world peace in his lifetime. On first note, this idea seemed cra-
zy and unattainable, but no one at Google discouraged him. To
fulfil his dream, Tan hired the renowned author Daniel Gole-
man and a professor from Stanford University who could help

n o t e s
him to design a course on mindfulness. Their course gained

high popularity and is still taught to all new hires at Google.
Offer employees uncommon freedom and control of their
time: Leaders at Google strongly believe in giving their em-
ployees freedom and consider it as the best idea to be progres-
sive. Employees at Google get several astonishing facilities at
workplace, but at the same time, Google is highly conscious
while selecting new employees. People at Google need to be
highly ambitious with proven track records of high achieve-
ment. Thus, at Google, all that autonomy comes with true ac-
countability and employees routinely exceed management’s
expectations for producing exceptional work.
Give significant voice to employees: Google aspires to make
S
people’s lives better through technology and to do great things.
This is what makes the employees highly ambitious and inspi-
rational. The company believes that doing significant work
alone is not sufficient to sustain employee commitment. What
IM
matters most is the ability to give people true influence on
how the organisation is run. According to May, “If you value
people and you care about them as whole people, one thing you
do is give them voice, and you really listen.”
Get feedback from employees: The employees provide feed-
back on all important aspects related to business and social
M
responsibility. The top leaders organise an employee forum

every Friday and respond to top 20 questions from employees
from all levels.
Not only this, but Google allows its employees to have access
N
to all important company data. This is done to build a culture

of trust among the employees. According to May, “All of this
defines the employer-employee relationship very differently. It
creates a different kind of experience being here, and also then
creates opportunities for us in what we try to solve together for
the world. I think all those add up.”

n o t e s
learning objectives

>> Explain different approaches to design operations strategy
>> Discuss the steps involved in strategy design process
>> Define the purpose of operations
>> Explain various focused operations strategies
>> Describe the benefits and drawbacks of focused operations
strategy
2.1 INTRODUCTION
S
In the previous chapter, you studied the concept of operations strate-
gy and how it is formulated. In this chapter, let us discuss how oper-
ations strategies are designed to provide a competitive advantage to
organisations.
IM
In today’s competitive environment, organisations require managing
their operations focusing on strategic considerations, such as design,
planning and control. Whether it is a manufacturing organisation or
a service organisation, the operations strategy works as a pattern of
operating decisions and is used to implement its corporate strategy
and create customer value. Thus, the major focus of any operations
M
strategy design is to add value to products or services that are provid-

ed by the organisation.
Design of an operations strategy requires a manager to take various

N
operational decisions. These decisions may relate to a number of com-

plementary issues, including the management of capacity, facilities,
process technology and equipment, inventory system, human re-
sources, vertical integration, quality, performance measurement, pro-
duction control and organisation design. These operational decisions
should be aligned with other internal business functions along with
the external business environment. An effective operations strategy
should ideally contribute to the competitiveness of the organisation. It
is a combined responsibility of different functional departments of an
organisation to design an effective operations strategy.
This chapter begins by explaining different approaches to design an

operations strategy. Next, it discusses the steps involved in the strate-
gy design process. It also explains the purpose of operations in terms
of mission, goals and objectives. Lastly, the chapter discusses various
strategies that an organisation may focus to achieve a competitive ad-
vantage in the market.

n o t e s
APPROACHES TO DESIGN OPERATIONS

2.2
STRATEGY
An operations strategy is designed for developing a general approach
to plan strategic choices that an organisation needs to make. These
choices often include aspects of operations that the organisation needs
to focus on for achieving a competitive advantage. More specifically,
the operations strategy of any organisation looks for gaining opera-
tional excellence (by effective utilisation of resources) and at the same
time satisfying its customers (by making products/services that match
their demands). Considering the requirements, operations strategy
design approaches focus on outlining the ways that an organisation
could follow for achieving the corporate objectives. In other words,
operations strategy design approaches pave the way for creating an
effective operations strategy.
S
Conceptually, there is no specific right way to design a strategy. An
organisation, while designing a strategy, considers all the factors that
IM
may affect the actual design of an operations strategy. A manager
needs to identify several strategies that could give reasonable solu-
tions and select the best.
Let us discuss the major approaches involved in designing an opera-

tions strategy.
M
2.2.1 ADJUST THE CURRENT STRATEGY
In any organisation, an operations strategy is rarely designed from

scratch. Usually, managers responsible for designing an operations
strategy start with an existing strategy and make revision, updates
N
or adjustment in it as per the current market situation or demand.

Here, managers focus on a periodic review of the current strategy and
assess its performance to judge whether the strategies can still bring
sustainable position to the organisation in the market and achieve
corporate goals.
If the default strategy is adequate then there is no need to take action.

However, if the default strategy is unacceptable, managers require
making adjustments in the current strategy. For this, the managers
are first required to analyse and identify current operational issues
and unproductive or redundant processes. The identification of weak
activities and processes can suggest the actions, needed to be taken
for removing or modifying the old processes. With an understanding
of the shortcomings of the current strategy, it is easier to modify the
same with required changes for achieving corporate objectives.
2.2.2 TOP-DOWN APPROACH
The top-down approach of strategy design is a traditional manage-

ment approach, where senior managers at corporate-level define a

n o t e s
mission and make strategic choices for the entire business. Senior
managers progressively develop corporate-, business- and function-
al-level strategies, which are passed down to the organisation in steps.
The top-down approach focuses on making large strategic decisions,
such as what type of business the organisation wants to be in, which
parts of the world the organisation wants to operate in, how fund and
resource allocation should be done for different businesses of the or-
ganisation and so on. These decisions form the corporate strategy of
the organisation.
Corporate-level strategies help in designing business-level strategies

for different businesses within the organisation. Each business also
needs to put together its own business strategy in relation to its cus-
tomers, markets and competitors. This leads to designing function-
al-level strategies for different functions within each business unit.
S
The functional-level strategies decide the role that each function must
play to contribute to the strategic objectives of the business. In other
words, different functional-level strategies, related to marketing, pro-
IM
duction, operations, human resource, etc. are designed in a manner so
that they could collectively help in achieving business-level strategies
of a business unit. Thus, as per the top-down approach of strategy de-
sign, senior managers design corporate-level strategies. This, in turn,
structures the business-level strategies for different business unit.
Business-level strategies are further drilled-down to create function-
al-level strategies for different functions within each business unit.
M
The major problem with the top-down approach of strategy design is

that it often suffers with the issues related to senior manager’s deci-
sion-making incapability, inadequate knowledge, lack of understand-
N
ing, out-dated skills, credibility, etc. This affects the overall strategic
design process.
2.2.3 BOTTOM-UP APPROACH
In contrast to top-down approach, the bottom-up approach assumes

that strategies are not designed in a single step by senior managers
at the corporate level. It emerges over time as a result of day-to-day
functional-level activities and experiences of the lower-level manag-
ers. The approach believes that, many a time, organisations move in
a particular strategic direction due to the on-going experience of pro-
viding products and services to customers at an operational level. It
convinces them that it is the right way of doing the things.
Lower-level executives respond to actual conditions and make prac-

tical decisions to cope with new problems arising in day-to-day work.
Thus, they are more connected with ground-level problems and have
their ways to deal with the same. The bottom-up approach believes
that the sum of their decisions eventually emerges as a strategy. Thus,

n o t e s
according to the bottom-up approach, day-to-day operational activi-

ties formulate the functional-level strategy, which leads to the design
of business-level strategies. These business-level strategies collective-
ly design the corporate-level strategy of the organisation.
The major problem with the bottom-up approach of strategy design

is that it involves a lower-level manager, who in spite of having fair
knowledge of day-to-day working lack in the skill of designing a strat-
egy that can make the best use of their potential. However, this issue
can be resolved with the help of strategy designers, who can take the
inputs from these managers and combine it with higher aspirations of
the organisation to get a workable operations strategy.
Though the aforementioned approaches are some popular approach-

es to design an operations strategy, there can be a lot of variation in
these. Some common concerns include the extent to which an existing
S
strategy can be adjusted, the amount of analysis that is possible, the
balance between strategy design and emergence and the final con-
tents of the strategy, etc.
IM
1. In _____________ approach, senior managers progressively

develop the corporate, business- and functional-level
strategies, which are passed down to the organisation in steps.
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2. According to the bottom-up approach, corporate-level

strategies help in designing the business-level strategies for
different business within the organisation. (True/False)
3. Strategies, related to marketing, production, operations,
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human resource, etc. are called _____________-level strategies.

4. _______________ approach emerges over time as a result of
day-to-day functional-level activities and experiences of the
lower-level managers.
5. In any organisation, an operations strategy is rarely designed
from scratch. (True/False)
Activity
Using the Internet, identify any five organisations that use bot-
tom-up approach for strategy design. Do you think the approach
helps organisations in getting connected with ground-level prob-
lems in a more efficient manner? Write a report based on your study.

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2.3 STEPS IN STRATEGY DESIGN PROCESS

The strategy design process involves a general approach consisting of
eight steps, shown in Figure 2.1:
Define the Analyse the

Assess the
purpose of operations
current strategy
operations environment
Evaluate the
Analyse the List alternative
alternatives and
internal new operations
choose the best
operations strategies
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Add details to the Implement the
chosen strategy strategy
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Figure 2.1: Steps in Strategy Design Process
Let us discuss the steps involved in the strategic design process in

detail.
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2.3.1 ASSESS THE CURRENT STRATEGY
The first step in strategy design is to assess the current strategy. As

discussed earlier, strategies are not designed from scratch. Managers
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work on current strategies to identify shortcomings and modify or

re-create them as per the current requirement. This requires a thor-
ough assessment of the current strategy.
While assessing current strategy performance, managers compare ac-

tual results in terms of sales, profitability and customer acquisition to
strategic goals. In addition to an overall comparison, managers also
focus on identifying factors that are responsible for performance im-
provement, such as repeat purchases or improved customer satisfac-
tion, etc. This helps in streamlining the overall strategy and making
the operations more efficient.
To assess the performance of the current strategy, organisations mea-

sure the usage of resources against potential benefits to ensure that
the resources are being used in an optimal way to provide the best
advantage. Apart from this, strategies are also assessed to ensure that
they address current market concerns, competition and the regulato-
ry environment appropriately. Managers verify whether the current
strategy is able to respond effectively to competitive threats. If there

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are political changes or new regulations that impact the organisation,

the strategy must address them. In addition, if the composition of mar-
ket segments changes or a market grows, the strategy should be able
to tackle the challenge and take the best advantage of the situation.
Thus, organisations, by assessing their prevailing strategies, judge the
real-time effectiveness of these strategies.
Many a time, organisations discover that some of the underlying as-

sumptions of their strategy are flawed or incomplete. In such a case,
though the organisation’s mission and vision may remain the same,
the objectives and goals require to be revised or updated. When this
happens, the managers either make adjustments to the strategy or
start the process over again.
2.3.2 DEFINE THE PURPOSE OF OPERATIONS
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Assessment of the current strategy provides a fair idea to managers
about current problems, opportunities, market shifts or any other is-
sues that demand solution or decision. It leads managers to define
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the gap between where they stand and where they want to be. Thus,
the next step in the strategy design process is defining the purpose of
operations. In other words, managers now focus on what they want to
achieve from newly designed operations strategy. In this regard, they
may ask the following questions:
How can the organisation grow, stabilise or retrench in order to
M
sustain in the future?

How can the organisation diversify its revenue to reduce depen-
dence on a major customer?
What the organisation must do to improve the cost structure and
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stay competitive?
How and where the organisation must focus to facilitate innova-
tion in products and services?
Thus, at this stage, managers focus on determining a set of aspirations

that the organisation desires to achieve. It forms the core of operations
strategy by building a framework that provides a direction to achieve
organisational objectives.
At this stage, various elements, such as vision, mission, objectives and

business definition of an organisation are developed. Vision exhibits
the position that an organisation wishes to achieve in the future; mis-
sion defines the means to achieve the vision. The mission of an organ-
isation is accomplished with the help of pre-determined, specific and
measurable long-term objectives. Every organisation selects a unique
path to achieve its long-term objective. The selection of the path de-
pends on the business definition of the organisation.

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2.3.3 ANALYSE THE OPERATIONS ENVIRONMENT
After formulating the purpose of the operations strategy of the organ-

isation, managers focus on analysing the operations environment. In
other words, after the formulation of vision, mission, goals and objec-
tives, the next step in the strategic design process is to analyse the
environment in which the organisation wants to operate. Scanning
the operations environment helps in understanding the surroundings
and performing in an efficient manner.
No organisation operates in isolation from environmental factors.

These factors comprise Political, Economic, Social, Technological,
Ecological and Legal (PESTEL) factors. For example, government
policies and plans change substantially with a change in the political
forces within the government. As a consequence, an organisation can
be affected to a large extent. Similarly, an organisation or an industry
S
as a whole gets affected by the economic conditions prevailing in a
country. For instance, in times of recession, most entertainment or-
ganisations witness a decline in sales. In addition, an organisation has
IM
to cope with interest rate fluctuations and inflation. The same is true
for social, cultural, technological and legal factors.
Usually, an organisation does not have any direct control over these
external environmental factors. However, proper analysis of such fac-
tors may help organisations to have an upper hand over competitors.
The long-term sustainability and success of an organisation depend
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largely on the favourability of these environmental factors. Thus, with

the help of external environment analysis, an organisation can iden-
tify opportunities and threats affecting the strategic operations deci-
sions of the organisation.
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2.3.4 ANALYSE INTERNAL OPERATIONS
Apart from external environmental factors, there are some internal

factors which affect the operations of an organisation. These factors
include organisational culture, structure, capabilities and resources.
Unlike the external environmental factors, an organisation usually
has direct control over these internal factors.
The operations of any organisation are largely affected by these in-

ternal factors. Therefore, it becomes important to thoroughly analyse
these factors to identify capabilities, weaknesses and competencies of
the organisation. This may further help to utilise opportunities exist-
ing in a highly competitive environment by avoiding threats. It also
helps the organisation to evaluate its performances with competitors.
Internal operations of the organisation usually have three components

– organisational resources, organisational capabilities and organisa-
tional competencies. Organisations use these components to evaluate

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its performance. Internal operations analysis helps the strategist to

identify strengths and weaknesses of the organisation and make effi-
cient strategic decisions.
2.3.5 LIST ALTERNATIVE NEW OPERATIONS STRATEGIES
A thorough understanding of the strengths and weaknesses of differ-

ent internal operations of the organisation enables managers to come
up with multiple strategic alternatives in alignment with opportuni-
ties and threats existing in the external environment.
Managers should list all possible alternatives and evaluate them based
on their contribution to the operations mission. However, it is not an
easy task as each strategy gives different levels of performance in dif-
ferent areas of concern. For example, a strategy that aims at achieving
high quality may result in low productivity or a high-capacity-based
S
strategy may lead to high costs and so on. Thus, each alternative strat-
egy may give diverse results. However, these alternative strategies can
be used as guidelines for identifying the best strategy. Managers must
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make their choice based on experience, judgement, discussion, agree-
ment and intuition.
2.3.6 EVALUATE ALTERNATIVES AND CHOOSE THE BEST
Usually, managers evaluate alternative strategies purely based on the

contribution made by each strategy to the operations mission. Howev-
M
er, as discussed, each strategy is likely to give different levels of perfor-

mance in different areas of concern. One may give higher quality, an-
other higher capacity and so on. This enforces managers to compare
the results likely to be produced by each alternative. Managers identi-
N
fy feasible alternative strategies and compare consequences. They se-

lect the strategy that seems to give them the best overall result. Here
you must understand that there is no formal way of identifying the
best strategy. Managers inevitably have different views about the best
solution. However, the final decision is generally based on the mutual
agreement of all managers.
2.3.7 ADD DETAILS TO THE CHOSEN STRATEGY
Before implementing a selected strategy, it is important to add details

to the chosen strategy. These details should be in terms of action plans
that break the overall strategy in small parts and identify issues asso-
ciated with it. After selecting the strategy, managers should translate
it from the organisational level to the individual level. They also need
to develop short-term goals and actions to support the organisation-
al direction. Fundamentally, this stage moves from planning and se-
lecting a broad-level strategy to decide operational activities that may
help in the effective implementation of the overall strategy. Managers
also focus on aligning resources and actions from the bottom to the

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top for achieving the business objective. At this stage, managers must
ask the following questions:
What do we need to adapt in our plan?
What emerging issues we need to identify and solve?
What tools and techniques we should select to execute our plan?
What should be the timeline to achieve strategic goals?
2.3.8 IMPLEMENT THE STRATEGY
Implementation of the strategy is the final step in the strategy design

process. It is a process that turns strategies and plans into actions in
order to achieve strategic objectives and goals. A strategic plan is a
written document that explains the plans of the business to reach its
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goals. However, it is the implementation part that makes strategic
plans happen. Implementation or execution relates with the ‘who’,
‘where’, ‘when’ and ‘how’ parts of the strategic plan.
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It is believed that implementation is more important than the formu-
lation and selection of the strategy. If you come up with an excellent
strategy and fail in its implementation, the whole objective of strategy
design would fail. The fact is that, though both the formulation and
the implementation are critical to success, organisations can gain a
competitive advantage only if implementation is done effectively.
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6. The first step in the design process of a strategy is to:

a. Analyse the operations environment
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b. Analyse the internal operations

c. Assess the current strategy
d. Define the purpose of operations
7. _______________ exhibits the position that an organisation
wishes to achieve in the future.
8. An organisation does not have any direct control over internal
environmental factors. (True/False)
9. The mission of an organisation is accomplished with the
help of pre-determined, specific and measurable long-term
___________.
10. After selecting the strategy, managers require to translate it
from organisational level to the individual level. (True/False)
11. The __________ step relates with the ‘who’, ‘where’, ‘when’
and ‘how’ parts of the strategic plan.

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Activity
Suppose you want to open a restaurant in your locality. For this,

you need to design an operations strategy. Write down the steps
that would be involved in the strategy design process for the res-
taurant.
DEFINING THE PURPOSE OF

2.4
OPERATIONS
As discussed earlier, defining the purpose of operations is important
for the success of an organisation. No organisation, be it small or large,
can succeed solely on the basis of innovative ideas. In addition to inno-
vative ideas, an organisation needs to have clearly defined long-term
S
goals and objectives that depict the future road map of the organisa-
tion. Further, long-term goals and objectives should be divided into
short-term goals and objectives. The organisation should also define
IM
the means to achieve the goals and objectives.
Goals, objectives, future direction and the core principles of the or-
ganisation are defined and communicated to establish the purpose of
operations that are to be performed within the organisation. In simple
words, the purpose of operations defines what the organisation wants
to achieve in the long-term, and through which means. It includes
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designing the mission, goals and objectives of the operations. It lays

down the framework for operations and helps in providing a direction
to achieve organisational goals. The purpose of operations could be
anything from gaining a competitive advantage to increasing profits
or lowering costs.
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2.4.1 DESIGNING THE OPERATIONS MISSION
An operations mission gives a broad statement of the purpose and

aims of operations performed within an organisation. In other words,
it gives overall intent and long-term strategic direction to the oper-
ations function. It serves as a focal point to identify the purpose of
overall operation function. In addition, operations mission helps in:
developing a basis or standard for allocating resources to different
operations
motivating employees to use resources efficiently
ensuring stability of the purpose within the organisation
facilitating
the transformation of objectives and goals into the
work structure
Considering the nature of operations mission, it is important to pay

huge attention on designing an effective operations mission. The

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mission statement should aim high, but should not be impossible to

achieve. In other words, the mission should always be realistic in na-
ture. In addition, it should be able to encourage employees to work
towards achieving operations objectives.
The operations mission design process starts with defining the long-
term goals of the operations function within the organisation. The
next step focuses on identifying the scope and purpose of operations,
analysing products and services produced by the organisation, iden-
tifying the stakeholders of the organisation and determining the tech-
niques and methods to be employed in operations. The third and final
step involves preparing the mission statement based on the strategies
for future operations, key values of the business and code of conduct
for business operations.
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2.4.2 DESIGNING GOALS AND OBJECTIVES OF
OPERATIONS
An operations mission is further expanded into a series of goals and

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objectives. The goals and objectives provide a mechanism for trans-
lating the strategy into actual operations. In other words, goals and
objectives of operations help in the effective implementation of strate-
gic plans as they often relate to the price, quality, speed, flexibility and
other relate factors.
The terms goal and objective are often used interchangeably. Howev-
M
er, there is a difference between the two. Goal is the purpose toward
which an operation is directed. In other words, it can be defined as an
outcome towards which the operation strives. For example, ‘we will
reduce operational cost by 10%’, is an example of goal. Objective, on
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the other hand, is the exact step or action, taken for reaching goals.
It is the specific action that helps in the attainment of the associat-
ed goal. For example, ‘monitor operations cost and prepare operating
budget’, ‘develop work procedure, and identify and eliminate bottle-
neck’ are some objectives that may help in achieving the goal of ‘re-
duce operational cost by 10%’. Thus, objectives can be perceived as
sub-goals that help in accomplishing the overall goals.
The goals and objectives of operations can be divided into:

Overall goals and objectives
Divisional and departmental goals and objectives
Individual and performance-based goals and objectives
Top management is usually interested in overall goals and objectives

of operations whereas middle management frames the divisional and
departmental goals and objectives. Individual and performance based
goals and objectives are handled by the lower management of the or-
ganisation.

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Each level of managers, by designing an effective mechanism; focus

on achieving the aims of a higher level. These mechanisms, in turn,
lead to a more detailed set of goals and objectives, which are then
passed down to lower levels. Here, you must understand that the goals
and objectives clearly depend on the type of operations performed by
an organisation.
12. The _________ of operations define(s) what the organisation

wants to achieve in the long-term, and through which means.
13. Which of the following gives a broad statement of the purpose
and aims of operations performed within an organisation?
a. Operations vision
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b. Operations mission
c. Operations goals
d. Operations objectives
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14. _____________ is an outcome towards which the operation
strives.
15. The exact step or action, taken for reaching the objective is
called goal. (True/False)
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Activity
Using the Internet, find the operations mission of the following re-
tail chain organisations:
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Walmart
McDonald’s
Starbucks
Tesco
Wills Sports (ITC)
Write a short note on how the operations mission of each organisa-

tion helps in defining the purpose of operations performed within
the organisations.
2.5 FOCUSED OPERATIONS STRATEGY

An operations strategy usually has a particular focus area wherein
it concentrates on one aspect of operations. An organisation can fo-
cus on any area of operations, related to cost, product differentiation,
niche or specialised products, materials management, timing, produc-

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tivity improvement, human resource management or a range of other

factors.
It is necessary for an operations strategy to focus on a particular area

of operations as it is difficult to perform all activities equally well.
Therefore, some strategic focus is required. This helps in taking defi-
nite decisions to develop distinctive capabilities for performing spe-
cific operations, which, in turn, helps in building competitiveness.
Apart from this, a strategic focus also provides a unified approach to
operations. It gives managers a direction to focus on completely for
achieving their aims.
In the next sections, let us discuss how focused operations strategy

can be used for different areas of operations.
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2.5.1 FOCUS ON COST
The focus on cost operations strategy aims to reduce operational cost.

The strategy is generally adopted by organisations that sell products
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at low cost in small markets. Organisations, following this strategy aim
at producing products at the lowest cost. This helps the organisation
to gain a competitive advantage as a cost leader in the market by pro-
ducing standardised products in high volumes. This leads the organi-
sation to gain economies of scale or efficiency. An organisation needs
to continuously search for low cost factors of production to achieve
and maintain this strategy.
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2.5.2 FOCUS ON PRODUCT DIFFERENTIATION
An organisation, following focus on the product differentiation strat-

N
egy aims to offer differentiated products in the market to attain com-

petitive advantage. Unlike the focus on cost strategy, where the focus
is on cost control, this strategy completely aims to give customised
products to its customers to satisfy their needs. Differentiation allows
organisations to focus on value creation of the product, which allows
them to charge premium prices. In focus on the product differentia-
tion strategy, the organisation should continuously focus on innova-
tion and improvement of the available product mix. In addition, the
organisation is required to segment the target market in such a way
that it targets products and services in a profitable manner. Market
segmentation can be done by the differentiation of products in terms
of design, brand image, technology, features, dealers, network or cus-
tomer’s service.
2.5.3 FOCUS ON NICHE OR SPECIALISED PRODUCTS
Focus on the niche or specialised products strategy is adopted by or-

ganisations that concentrate on selecting a specific customer segment
to cater to its specific needs by customising the marketing mix and

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product mix. Markets serving very specific customer segments are

called niche markets. This type of the focus strategy is suitable for
smaller organisations that neither focus on the cost operations strate-
gy nor a differentiation strategy. It allows organisations to streamline
their efforts and resources on a narrow and specifically defined seg-
ment of a market. Every market segment or niche has its own compet-
itive advantage.
2.5.4 FOCUS ON MATERIAL MANAGEMENT
The cost associated with materials may constitute 20–50% of the total
cost. Thus, efficient procurement and handling of materials is vital to
the successful completion of business operations. Material manage-
ment is concerned with the planning, procuring, storing and distribu-
tion of materials in an efficient manner. It has an impact on all busi-
S
ness functions, particularly finance, marketing and operations. The
finance department tries to keep the level of inventories low for saving
the capital. Marketing department tries to maintain a high level of
inventories for ensuring good services to customers. The operations
IM
department requires an adequate inventory level for efficient produc-
tion and smooth employment levels. Now, above-mentioned conflict-
ing objectives can be met by proper management of materials.
Focus on the material management strategy aims to achieve an inte-

grated approach towards the management of materials in an organi-
M
sation. The major objective is the reduction of cost and efficient han-
dling of materials at all stages and in all sections of the organisation.
Focus on the material management strategy also has several other
important aspects connected with material, such as purchasing, stor-
age, inventory control, materials handling, standardisation, etc. The
N
strategy also states that the planning, acquiring, storing, moving and
controlling of materials should be conducted in such a manner so that
the usage of facilities, personnel and capital funds can be optimised
and quality service can be provided to customers.
Focus on the material management strategy aims at getting the right

quality and quantity of materials at the right time from the right source
to carry out the production process effectively. This ultimately results
in increased sales, improved customer service and reduction in the
manufacturing cost of an organisation. Apart from this, the main ob-
jective of focus on the material management strategy is to:
procure an adequate amount of materials for production at a low
cost
obtain the least possible price for purchased materials
reduce the levels of inventory to save the capital tied up in inven-
tories
improve the efficiency of materials handling so that the real cost of
material gets reduced

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ensure an uninterrupted supply of materials, because the shortage

of supply leads to an increase in the cost of production
supervise the quality of the material, as the quality of the end prod-
uct depends on materials that are used to produce it
maintain cordial relations with suppliers, which benefit the buying
company in more than one way
2.5.5 FOCUS ON TIMING
Focus on the timing strategy aims at moving materials quickly through

the supply chain. The strategy focuses on the speed factor that helps
in ensuring fast response and short lead times. Organisations that fo-
cus on timing, aim to deliver products/services when required (in the
market). This not only improves the credibility and reliability of the
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organisation in the market but also helps the organisation in gaining
competitive advantage over others.
With increasing competitiveness, customers have higher expectations

IM
from organisations and suppliers. They do not like to wait and want
product/service delivery in the minimum possible timeframe. In other
words, customers prefer suppliers, who can deliver the product/ser-
vice on time or when promised. Thus, timeliness is the focal point of
the customer-supplier relationship. For example, big E-retailers, such
as Amazon or Flipkart focus heavily on accelerating their delivery
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times to keep up with the delivery time promises made to customers.
An organisation with a focus on the timing strategy aims to minimise

the time between the production and the delivery of products/services
to customers. For example, Domino’s Pizza, an international franchise
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pizza delivery corporation is associated with the credibility of deliv-

ering pizzas in 30 minutes. For late delivery, the product is provided
free-of-charge.
In order to manage time, organisations focus on reducing cycle time.

Cycle time is the amount of time involved in the execution of a specific
activity. Sourcing goods for inventory, filling and shipping a customer
order, responding to an emergency call, and resolving a client prob-
lem are examples of tasks that have cycle times. Apart from the cycle
times, reducing wait time is also necessary for ensuring the speedy
delivery of products/services. Wait time is the non-productive time of
a team when it has to wait for its inputs to execute its tasks. For exam-
ple, consider a pizza delivery process. There is one person who pre-
pares dough and another person who applies the toppings. Now, till
the person preparing the dough does not deliver the dough to the piz-
za topper, the pizza topper will have to wait to execute his task. This
wait time is an addition to the overall pizza delivery time. In addition,
an organisation also should focus on whether a task is completed by
a specified time, as in a due date. Delivering orders when they were

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promised, increases the credibility of an organisation and helps it in

achieving a competitive edge.
2.5.6 FOCUS ON PRODUCTIVITY IMPROVEMENT
Productivity has become a crucial aspect these days for everyone. In

an organisational context, productivity refers to an amount of work
done in a given time. Higher productivity leads to lower costs, im-
proved competitiveness and high profits for an organisation. There-
fore, an organisation deploys various techniques and methods to en-
hance its productivity.
Focus on productivity improvement strategies aim at organising and

implementing a series of activities, such as product design, forecasting,
organising physical facilities and materials management in a manner
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that the productivity of an organisation can be improved. It is the pro-
ductivity of men and other resources that decides the substantiality of
an organisation and the growth of an economy further.
IM
It should be noted that different industries consider productivity dif-
ferently. For example, in the manufacturing sector, productivity is
measured on the basis of the number of hours taken by labour and
machines to produce the output. On the other hand, in the service
sector, productivity is measured on the basis of the total revenue gen-
erated by employees.
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Focus on productivity improvement strategies aim at improving the

overall performance of an organisation over a period of time by identi-
fying the areas of development. Apart from this, productivity focused
strategies also emphasise on:
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Increasing reserve funds that can be used for expansion and mod-
ernisation
Reducing overheads and various other costs per unit of the output
Improving the quality of products

Increasing the competitive strength of the organisation
Maintaining a fair compensation system
The productivity-focused strategies bring a competitive advantage for

an organisation in terms of higher and improved productivity. These
strategies also help in:
Tracking an operating unit’s performance over time
Scheduling equipment
Conducting financial analysis
Planning workforce requirements

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2.5.7 FOCUS ON HUMAN RESOURCE MANAGEMENT
In today’s highly competitive environment, organisations need to con-

tinuously explore different ways of gaining a competitive edge over
other organisations. Traditional differentiating factors, such as tech-
nological advantage, product quality, low cost structure and distribu-
tion system of organisations can be easily imitated by competitors.
However, competent and motivated workforce cannot be emulated.
Therefore, organisations have started emphasising on the potentiality
of employees to deliver high quality products and to gain a unique
competitive advantage. Today, most of the highly competitive organi-
sations, such as General Electric, FedEx, Google, Southwest Airlines,
Boeing and Starbucks have been highly successful in utilising the po-
tentiality of employees in delivering excellent products and services.
According to David Ulrich, the Author of Human Resource Cham-
S
pions (1996), “Employee contribution becomes a critical business issue
because in trying to produce more output with less employee input, com-
panies have no choice but to try to engage not only the body but the mind
IM
and soul of every employee.”
Focus on human resource management strategies aim at attracting,

appraising and retaining employees for utilising their knowledge and
skills to improve the overall performance of the organisation. To effec-
tively channel the competency of employees towards the fulfilment of
organisational goals, the focused strategy tends to:
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Identify the desired objectives of the organisation and how to

reach there by improving the current situation
Communicate organisational strategies to employees explicitly
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Encourage the employees to behave pro-actively

Motivate employees to participate in critical thinking and brain-
storming
Create a sense of belongingness among employees
Align employees with the values and beliefs of the organisation
Identify and solve human resource related issues
Identify skill gaps and training needs of employees
Relate the overall growth of the organisation with the individual
goals of employees
Identify opportunities to reward and motivate employees
Human resource management focused strategies help an organisation

to:
treat employees as internal customers
ensure an energised and fearless workplace

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give flexibility to balance family life and work life

encourage employees to come up with suggestions and opinions
create a supportive and learning organisational culture
empower employees to take independent decisions
focus on the strengths of employees rather than their weaknesses
inform and update employees about the latest happenings in the
industry
identify skill gaps and bridge them through training and develop-
ment
Today, most organisations are focusing on human resource manage-

ment for improving performance, competence and organisational ef-
ficiency and thereby, creating a competitive advantage for the organ-
S
isation.
2.5.8 FOCUS ON OTHER FACTORS

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Apart from cost, product differentiation, niche or specialised prod-
ucts, materials management, timing, productivity improvement and
human resource management, an organisation may focus on several
other factors to achieve competitiveness. Some of these factors are as
follows:
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QUALITY MANAGEMENT
In today’s competitive environment, if an organisation wants to sur-

vive, it has to produce goods and services exceeding the minimum
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required quality. The level of quality should be decided in accordance

with other important factors so that the product is well absorbed in
the market.
Now, the question arises that what quality standards are. Standards
refer to the specification of the manufactured product, according to
which, the product has to perform. This may include performance,
appearance, dimension, etc. The quality of a product or service is af-
fected by a number of factors such as availability of resources, man-
ufacturing conditions, total capital; management policy related to
quality level and production methods. To win in today’s competitive
business environment, it is important for every organisation to man-
age the quality of its products/services. Quality management helps an
organisation to increase its sales and market share and achieve a com-
petitive advantage. On the contrary, if the quality of products and ser-
vices is not satisfactory, it may incur huge costs for inspection, testing,
scrap, rework and handling of complaints.

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CUSTOMER RELATIONSHIP MANAGEMENT (CRM)
CRM may be defined as a business strategy that focuses on customer

satisfaction and retention. Nowadays, organisations use CRM systems
for storing and analysing information related to customers, like their
name, contact history, needs and preferences and repeat purchases.
This information enables organisations to take sound business deci-
sions by identifying customer needs and expectations and fulfilling
them. This in turn helps to strengthen relationships with customers,
improve the level of service quality and achieve greater customer sat-
isfaction.
SERVICE PROCESS MANAGEMENT
Services include people, technology and processes required to achieve

customer satisfaction. Service processes include all those activities
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that are designed to provide services as per customer satisfaction.
Managing service processes is a complex and difficult task. This is due
to the fact that service-oriented business deals with intangibles and
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being intangible, it is subjected to individual preferences. In order to
deal with intangibles, separate strategies are required to be developed
and executed. Same strategy cannot be used for each and every cus-
tomer because each customer wants customisation in services. Man-
aging customisation in services as per the demands of customers may
require new and specialised resources. Therefore, there should be a
M
constant supply of resources in a minimum amount of time to accom-

plish customer demands. Service process management helps in:
providing a clear roadmap of roles and responsibilities for each
and every individual in an organisation
N
enabling employees to learn quickly and get on to the process of

doing the job because everything is documented and well-main-
tained; this approach reduces learning time and enables employ-
ees to quickly become productive
minimising operating cost, as the cost involved in rework, rede-
sign and defects is greatly reduced
assisting an organisation in business expansion with little time for
scalability because most of the processes are in control
bringing transparency in operational processes
enabling an organisation to work with increased efficiency be-
cause the roles, responsibilities and the authority are clearly de-
fined and documented
providing a competitive advantage to an organisation as rework
time is greatly reduced

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BRAND MANAGEMENT
A brand is a set of assets that contains uniqueness, values and long-

term relationship with customers. These help in establishing an emo-
tional connection with the target audience. Brand management is
a process of creating and sustaining the brand. It makes customers
committed to the business. A strong brand not only differentiates your
products/services from competitors, but also gives a quality image to
your business. It aims at fulfilling the commitment of defining, posi-
tioning and delivering the brand to the customer.
Brand management involves creating a promise, making that promise

and maintaining it. In other words, it means defining the brand, po-
sitioning the brand and delivering the brand. Let us understand the
three stages in brief:
S
1. Creating a promise: This step focuses on defining the brand and
making it memorable and desirable for customers.
2. Making the promise: This step assures the delivery of product/
IM
service with set quality standards to a customer.
3. Keeping the promise: This step aims at sustaining the promise
of delivering a quality product/service.
Brand management involves several key aspects, such as customer

satisfaction, cost, competition, values and quality. Proper brand man-
agement not only accelerates the sale of a product/service, but also
M
helps in providing a competitive edge to the organisation.
OPERATIONS RESEARCH
N
Decision making is involved in almost every task, be it small or big.

You need to make decisions even in day-to-day activities, such as
which movie to watch and which restaurant to dine in. Such decisions
are trivial in nature and do not have much impact on our lives. How-
ever, in case of business, decision making plays a very crucial role. The
profitability and growth of a business depend on decisions taken by
the management. Decisions can make or break a business. Therefore,
business decisions should be taken after a thorough analysis. To make
appropriate business decisions, a separate branch of mathematics,
commonly known as Operations Research (OR), has evolved.
Operations research is an approach that focuses on recommending

the best course of action for solving operational problems of an organ-
isation. It provides a quantitative aid to the decision-making process
of an organisation and enables managers to select the best course of
action from the available alternatives.
Operations research observes the essential features of an operational

problem, collects relevant data and carries out quantitative analysis
by applying appropriate mathematical and statistical tools. It can be

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effectively used for problems related to manufacturing, maintenance

and installation in organisations. Apart from this, operations research
solves problems related to agriculture, public distribution of commod-
ities and railway booking.
JUST-IN-TIME (JIT)
JIT is a manufacturing philosophy that focuses on continuous im-

provement in productivity by eliminating wastes and reducing the lev-
el of inventory. According to the Association for Operations Manage-
ment (APICS), JIT is a “philosophy of manufacturing based on planned
elimination of all waste and continuous improvement of productivity.”
The JIT approach is beneficial as it aims at getting the right amount
of inventory for producing the right quantity of final products at the
right time. However, it requires a careful scheduling of resources so
S
that they can be used as and when required in the production process.
It is a continuous process and seeks to eliminate raw material stocks
and finished stocks. This system of manufacturing ensures that the
product is delivered at the right time, is of perfect quality and is manu-
IM
factured in accordance with the right production plans. However, JIT
cannot be implemented if the quality components, such as accessibil-
ity, effectiveness, efficiency, customer satisfaction and involvement of
people, are not continuously made available.
The concept of JIT lays emphasis on the fact that whatever needs to
M
be produced, should be of the highest level of quality. JIT is not re-

stricted to manufacturing, but can be extended to distribution, sales,
marketing and finance also. It is applicable to both manufacturing
and service industries. The JIT system of manufacturing aims to meet
customer’s requirements of quality, cost and delivery time. If there
N
are any uneconomical factors that affect these requirements and are
wasteful, they should be eliminated. For instance, factors such as
keeping unnecessary equipment and holding large inventories tend
to increase costs, hence and must be eliminated. JIT teaches us an
effective method of manufacturing.
Broadly speaking, JIT focuses on maintaining an uninterrupted flow

of the production process. Apart from this, the following are some of
the major objectives of JIT:
Producing quality products as per the requirements of customers
Increasing machine efficiency by eliminating extra load
Reducing lead time, batch size and inventory levels
Reducing setup time by maintaining consistency in production
and eliminating wastes
Reducing the idle time of labour and machines
Achieving the zero-level of inventory

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Ensuring high process reliability

Aligning JIT goals with overall organisational goals and objectives
TRANSPORTATION AND DISTRIBUTION
Transportation is a process in which products are moved from one

location to another. It plays an important role in a supply chain, begin-
ning from the manufacturing of products to their delivery to custom-
ers. For an organisation, selecting a correct mode of transportation
can prove to be a major factor in determining many parameters, such
as cost reduction, safe delivery of products, etc. An economical and re-
sponsive transportation network helps organisations to reduce costs
and increase customer service levels while minimising disruptions in
the supply chain flow.
S
Distribution is another critical aspect in supply chain as it includes
the movement of services and products from a source to end custom-
ers. This helps in meeting delivery schedules within the definite time.
Therefore, organisations focus on building a distribution network that
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helps them in activities like reducing supply chain costs, delivering
products on time and enhancing responsiveness of a supply chain.
A distribution network includes different distribution channels that
serve as a route or path through which products move from supply
sources to their demand destinations. It includes manufacturers and
different members such as agents, wholesalers and retailers who act
M
as a medium of interaction between consumers and manufacturers.
INFORMATION TECHNOLOGY (IT)
Information technology can be defined as a set of interconnected

N
components that gathers, stores, processes, creates and disseminates

the information required for efficient business decision making. In-
formation technologies and systems used in a supply chain connect
different parties into a combined and coordinated system. As a result,
cycle time reduces, cross-functional processes are redesigned and
cross-selling opportunities are utilised. Information technology allows
a smooth flow of appropriate information between the point of origin
of a supply chain and its point of consumption. This information can
be about sales forecasts, inventory levels, delivery schedules and or-
der status.
In reality, there is an almost endless list of possible factors or areas on

which an organisation can focus. Many organisations focus on a range
of factors collectively. For example, an organisation focusing on low
cost may also focus on improving productivity and quality, reducing
delivery time or creating a powerful brand. Different focus points of-
ten result into common conclusions. For example, focus on time and
material management, both results in the quick movement of mate-
rials through supply chain. Thus, strategic focus on one operational
aspect does not mean that all other areas are unattended.

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2.5.9 BENEFITS AND DRAWBACKS OF FOCUSED

OPERATIONS STRATEGY
An organisation, with the help of focused operations strategy, can eas-

ily achieve the benefits of specialisation. It can also become a mar-
ket leader by focusing on one operational area and gaining expertise
in that area. This ultimately leads the organisation to design highly
efficient operations, which result into increased productivity and de-
creased costs.
On the negative side, the focused operations strategy may lead an or-
ganisation to become vulnerable to changes. As the organisation and
the employees become too focused or specialised in one particular
area of operations, it becomes difficult to shift to another operations
flexibly with a change in the market environment.
S
16. Focus on product differentiation strategy completely focuses

IM
on giving customised products to its customers to satisfy their
needs. (True/False)
17. Markets serving very specific customer segments are called
___________.
18. Differentiation allows organisations to focus on value creation
M
of the product, which in turn allows them to charge low prices.

(True/False)
19. _____________ is concerned with the planning, procuring,
storing and distribution of materials in an efficient manner.
N
20. Focus on _____________ strategy aims at moving materials

quickly through the supply chain.
a. Productivity improvement
b. Human resource management
c. Material management
d. Timing
21. _____________ is a manufacturing philosophy that focuses
on continuous improvement in productivity by eliminating
wastes and reducing the level of inventory.
Activity
Using the Internet, identify three service organisations that by fo-

cusing upon product/service differentiation strategy, radiantly dif-
ferentiated themselves from the competition. Write a short note
covering major points of differentiation for each organisation.

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2.6 SUMMARY
The design of an operations strategy focuses on developing a gen-
eral approach to design the strategic choice that an organisation
needs to make.
There is no specific right way to design a strategy. An organisation,
while designing a strategy, considers all factors that may affect the
actual design of an operations strategy.
Major approaches involved in designing the operations strategy
are:
Adjust the current strategy
Top-down approach
Bottom-up approach
S
Usually, managers, responsible for designing an operations strat-
egy, start with an existing strategy and make revision, update or
adjust in it as per the current market situation or demand.
IM
The top-down approach of strategy design is a traditional manage-
ment approach, where senior managers at the corporate level de-
fine a mission and make strategic choices for the entire business.
The bottom-up approach assumes that strategies emerge over
time as a result of day-to-day functional-level activities and expe-
M
riences of lower-level managers.

The strategy design process involves a general approach consist-
ing of eight related steps, which are:
1. Assess the current strategy
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2. Define the purpose of operations

3. Analyse the operations environment
4. Analyse the internal operations
5. List alternative new operations strategies
6. Evaluate alternatives and choose the best
7. Add details to the chosen strategy
8. Implement the strategy
Managers assess current strategies to identify their shortcomings
and modify or re-create them as per the current requirement.
The purpose of operations defines the vision, mission, objectives
and business definition of an organisation.
Analyse of the operations environment helps the organisation in
understanding the surroundings and performing in an efficient
manner.

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In addition to external factors, internal factors, such as organisa-

tional culture, structure, capabilities, and resources also affect the
operations of an organisation.
Thorough understanding of the strengths and weaknesses of dif-
ferent internal operations of the organisation enables managers to
come up with multiple strategic alternatives in alignment with the
opportunities and threats, existing in the external environment.
Managers evaluate alternative strategies based on the contribu-
tion made by each strategy to the operations mission.
After selecting the best strategy and before implementing the
same, it is important to add details to the chosen strategy. These
details should be in terms of action plans that break the overall
strategy in small parts and identifies the issues associated with it.
S
Implementation of the strategy is the final step in the strategy de-
sign process. It is a process that turns strategies and plans into
actions in order to achieve strategic objectives and goals.
IM
An operations mission gives a broad statement of the purpose and
aims of operations performed within an organisation.
Goal is the purpose toward which an operation is directed.
Objective is exact step or action, taken for reaching the goals.
An operations strategy usually has a particular focus area wherein
M
it concentrates on one aspect of operations.

The focus on cost operations strategy focuses on cost reduction.
An organisation, following focus on product differentiation strat-
egy, aims to offer differentiated products in the market to attain
N
competitive advantage.
Focus on niche or specialised products strategy is adopted by or-
ganisations that concentrate on selecting a specific customer seg-
ment with a view to cater to its specific needs by customising the
marketing mix and product mix.
Focus on material management strategy aims to achieve an inte-
grated approach towards the management of materials in an or-
ganisation.
Focus on timing strategy aims at moving materials quickly through
the supply chain.
Focus on productivity improvement strategies aim at organising
and implementing a series of activities, such as product design,
forecasting, organising physical facilities and materials manage-
ment in a manner that the productivity of an organisation can be
improved.
Focus on human resource management strategies aim at attract-
ing, appraising and retaining employees for utilising their knowl-

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edge and skills to improve the overall performance of the organi-

sation.
There is an almost endless list of possible factors or areas on which
an organisation can focus. Many organisations focus on a range of
factors collectively.
An organisation, with the help of focused operations strategy, can
easily achieve the benefits of specialisation.
key words
Allocation: The process of distribution of resources for a partic-

ular activity or task.
Market segmentation: The process of dividing a market of po-
tential customers into groups or segments, based on diverse
S
characteristics.
Market shift: A change in the quantity demanded or supplied
at a given price, often as a result of changes in the particular
IM
market.
Marketing mix: A set of marketing activities (including prod-
uct, price, place and promotion), used to promote and sell a
product into the market.
Procurement: The function of purchasing, transportation,
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warehousing and inbound receiving of something.

Product mix: The total range of products offered by an organi-
sation in a market for sale.
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1. Discuss the top-down and the bottom-up approach of strategy
design in detail.
2. What is the implication of assessing the current operations
strategy in a strategy design process?
3. What is the significance of adding details to the chosen strategy?
4. Why is it said that implementation is more important than the
formulation and selection of the strategy?
5. Write a short note on the importance of defining the purpose of
operations.
6. What do you understand by operations mission? How is it
designed?
7. What do you understand by focused operations strategy?
8. Write a short note on focus on product differentiation strategy.

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9. Discuss the case, when organisations go for focus on niche or

specialised products strategy. Give example in support of your
answer.

Approaches to Design 1. Top-down
Operations Strategy
2. False
3. Functional
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4. Bottom-up
5. True
Steps in Strategy Design 6. c. Assess the current strategy
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Process
7. Vision
8. False
9. Objectives
10. True
M
11. Implementation
Defining the Purpose of 12. Purpose
Operations
13. b. Operations mission
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14. Operations goal

15. False
Focused Operations Strat- 16. True
egy
17. Niche markets
18. False
19. Material management
20. d. Timing
21. Just-in-Time (JIT)

1. The top-down approach of strategy design is a traditional
management approach, where senior managers at the corporate
level define a mission and make strategic choices for the entire
business. The bottom-up approach assumes that strategies
emerge over time as a result of day-to-day functional-level

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activities and experiences of the lower level managers. Refer to

Section 2.2 Approaches to Design Operations Strategy.
2. Organisations assess current strategies to identify shortcomings
and modify or re-create strategies as per the current requirement.
Refer to Section 2.3 Steps in Strategy Design Process.
3. Details are added to the chosen strategy in terms of action plans
that break the overall strategy in small parts and identify issues
associated with it. Refer to Section 2.3 Steps in Strategy Design
Process.
4. It is believed that implementation is more important than
the formulation and selection of the strategy as it is a process
that turns strategies and plans into actions in order to achieve
strategic objectives and goals. Refer to Section 2.3 Steps in
Strategy Design Process.
S
5. The purpose of operations defines what the organisation wants
to achieve in the long-term, and through which means. Refer to
Section 2.4 Defining the Purpose of Operations.
IM
6. An operations mission gives a broad statement of the purpose
and aims of operations performed within an organisation. Refer
to Section 2.4 Defining the Purpose of Operations.
7. An operations strategy usually has a particular focus area
wherein it concentrates on one aspect of operations. Refer to
M
Section 2.5 Focused Operations Strategy.

8. An organisation, following focus on the product differentiation
strategy aims to offer differentiated products in the market to
attain a competitive advantage. Refer to Section 2.5 Focused
N
Operations Strategy.
9. Focus on niche or specialised products strategy is adopted by
organisations that concentrate on selecting a specific customer
segment with a view to cater to its specific needs by customising
the marketing mix and product mix. Refer to Section 2.5 Focused
Operations Strategy.
SUGGESTED READINGS
[u.a.] ; Munich: Pearson.
Kale,

n o t e s
E-REFERENCES
Choosing Strategies for Change. (2017). Harvard Business Review.
Retrieved 30 May 2017, from https://hbr.org/2008/07/choosing-strat-
egies-for-change
Develop Your Strategy’s Mission, Vision & Values. (2017). OnStrate-
gy. Retrieved 30 May 2017, from https://onstrategyhq.com/resourc-
es/developing-your-strategy/
Do, W., & Strategy, A. (2017). Assess your Current Strategy – For-
micio. Formicio.com. Retrieved 30 May 2017, from http://formicio.
com/index.php/what-we-do/assess-your-current-strategy
Strategic Marketing Plan Strategy Evaluation. (2017). Smallbusi-
ness.chron.com. Retrieved 30 May 2017, from http://smallbusiness.
chron.com/strategic-marketing-plan-strategy-evaluation-72977.
S
html
What Is the Business Difference Between Objectives & Goals?
(2017). Smallbusiness.chron.com. Retrieved 30 May 2017, from
IMhttp://smallbusiness.chron.com/business-difference-between-ob-
jectives-goals-21972.html
M
N

C h a
3 p t e r
FORMULATING CORPORATE-LEVEL STRATEGY
CONTENTS
S
3.1 Introduction
3.2 Defining Corporate-level Strategies
IM
Activity
3.3 Expansion Strategies
3.3.1 Expansion through Concentration
3.3.2 Expansion through Integration
3.3.3 Expansion through Diversification
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3.3.4 Expansion through Cooperation

3.3.5 Expansion through Internationalisation
3.3.6 Expansion through Digitalisation
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Activity
3.4 Stability Strategies
3.4.1 Small Exploration Strategy
3.4.2 No Change Strategy
3.4.3 Profit Strategy
Activity
3.5 Retrenchment Strategies
3.5.1 Turnaround Strategies
3.5.2 Divestment Strategies
3.5.3 Liquidation Strategies
Activity
3.6 Combination Strategies
Activity

CONTENTS
3.7 Balanced Scorecard

Activity
3.8 Summary
S
IM
M
N

FORMULATING CORPORATE-LEVEL STRATEGY 77
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STARBUCKS EXPANSION STRATEGIES TO ENTER

INDIAN MARKETS
Source: www.stocks.org
Based in Seattle, Starbucks Corporation is the most popular chain
S
of coffee shops in the world. Starbucks deals in drip-brewed cof-
fee, espresso-based hot drinks, other hot and cold drinks, snacks
and products such as mugs and coffee beans. As of November
IM
2016, it operates 23,768 locations worldwide, including about
13,107 in the United States itself.
India was one of the big untapped markets for Starbucks till the
date. However, in January 2011, Howard Schultz, Chairman and
CEO of Starbucks, visited India to sign the 50:50 joint ventures
with Tata Global Beverages that owns 8,258 sq. feet roasting facil-
M
ity at Kushalnagar near Coorg. Schultz said in an interview that

India is as large an opportunity as there exists in the world, coupled
with China.
The outlets are branded as, “Starbucks, A Tata Alliance”. Howev-

N
er, Starbucks ensured that the coffee at the roasting facility match
the global espresso blend of Starbucks. On 19 October, 2012,
Starbucks opened its first store in India in Mumbai. Starbucks
expanded its branch to Delhi by opening two stores in Delhi at
Terminal III of the Indira Gandhi International Airport and in
Connaught Place. They currently (year 2016-17) operate 88 stores
in leading metro cities, such as Delhi, Mumbai, Banagalore, Pune,
Hyderabad and Chennai.
Source: www.oneworldnews.com

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The company is planning to open more stores and grow in the

market with an assurance to offer the unique Starbucks experi-
ence, unequalled service and extensive food and beverages offer-
ings to coffee lovers across the nation.
According to John Culver, Group President, Starbucks China

and Asia Pacific, Channel Development and Emerging Brands, at
the opening of the 50th Starbucks store in India, said we strongly
reiterates our commitment to the Indian market for the long-term
and our focus on expanding thoughtfully to ensure we are consis-
tently delivering the highest quality Starbucks Experience to each
customer in every store. Providing an elevated coffeehouse expe-
rience that embraces uncompromising quality, diverse offerings,
unique store ambience to offer our customers an unmatched Third
S
Place and passionate partners who deliver this to every customer
with every cup is a promise that we have consistently endeavoured
to deliver. We remain deeply excited about our journey in India, and
we will continue to deliver on our promise of offering an unparal-
IM
leled coffeehouse experience to every customer, every time they visit
our stores, as well as nurturing our biggest assets – our partners.
Apart from the usual products offered internationally, Starbucks

India has modified its menu to certain extent to match the Indi-
an taste. For example, one can find popular Indian preparations
such as Tandoori Paneer Roll, Elaichi Mawa Croissant and Murg
M
Tikka Panini in the menu offered in Indian outlets of Starbucks.
Starbucks is aggressively targeting India’s cafe chains market

that’s growing annually by 20 per cent and is currently ruled over
by Cafe Coffee Day (CCD). India has over 1,400 cafes, and accord-
N
ing to a report by Technopak advisors, there is a huge potential

for more than 2,700 cafes in the country in upcoming five years.
According to Santhosh Unni, CEO of Costa Coffee India, The cafe

market is small, and needs to grow faster. The entry of chains like
Starbucks and Dunkin’ Donuts will help generate more demand.
According to Saloni Nangia, President, Technopak, Starbucks

understands how to create the Starbucks experience. For the supply
chain, which is the difficult part in India, the Tatas bring in com-
plete understanding.
As Schultz said in a news conference, With Tata’s help and the size
and scale of this (Indian) market, we believe that this is a market
that we will grow significantly in over the near future.

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learning objectives

>> Define corporate-level strategies
>> Discuss various expansion strategies
>> Describe different stability strategies
>> Explain the different types of retrenchment strategies
>> Discuss combination strategies
>> Explain the concept of Balanced Scorecard
3.1 INTRODUCTION
In the previous chapters you studied the concept of operations strat-
S
egies and how they are designed within an organisation. In this chap-
ter, let us discuss how corporate-level strategies are formulated by an
organisation.
IM
Corporate-level strategies are formulated to cover the overall corpo-
rate objectives of any organisation. They focus on every portfolio of all
business units simultaneously and try to address two basic questions:
a. In what business, the organisation should deal to maximise its
long run profitability?
M
b. What strategies and roles should the organisation play to increase

economic and non-economic value as well as competence for the
organisation?
The corporate-level strategy gives primary guideline and direction to

N
an organisation for performing different operations. If the organisa-

tion consists of more than one business unit, corporate-level strategies
will be concerned with all the units, in terms of ‘what the businesses
should be’, ‘how the resources should be allocated between them’,
‘how to manage relationship between the corporate unit and business
units’, etc. Corporate strategy is often described in the form of corpo-
rate mission or vision statement. Thus, the function of corporate-level
strategy is to outline the overall strategy for the entire organisation
(including different business units, if any), define the market, in which
the organisation will operate and plan how to enter in these markets
to gain competitive advantage.
There are four types of corporate-level strategies, namely expansion

strategies, stability strategies, retrenchment strategies and combina-
tion strategies. The stability strategies are adopted when an organisa-
tion is satisfied with its current level of growth; whereas, expansion
strategies are adopted when an organisation aims at high growth by
expanding its business operations. The retrenchment strategies are
applied when an organisation aims at the contraction of activities.

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On the other hand, combination strategies are followed when an or-

ganisation adopts a mixture of stability, expansion and retrenchment
strategies. These corporate-level strategies help in taking decisions
regarding allocation, transfer and management of resources in an or-
ganisation.
This chapter starts with a detailed explanation of corporate-level strat-

egies. Further, it discusses the various forms of expansion and stabil-
ity strategies in detail. Moreover, the chapter discusses retrenchment
and combination strategies at length. Lastly, the chapter explains the
concept of Balanced Scorecard and its role in implementing the cor-
porate-level strategies in an organisation.
DEFINING CORPORATE-LEVEL
3.2
STRATEGIES
S
A corporate-level strategy is often referred to as a corporate strategy
or a corporate business strategy. It encompasses the strategic scope
of the entire organisation. For most organisations, a corporate-level
IM
strategy is the only strategic plan required. Corporate strategy refers
to a set of decisions that determine an organisation’s objectives, goals
and purpose. It also comprises of the principal policies and plans to
achieve those objectives. In short, corporate-level strategies are for-
mulated to fulfil the corporate objectives of the organisation.
M
The corporate-level strategy sets the range of business activities of the

organisation and the kind of economic and non-economic role it in-
tends to play to the organisation, shareholders, employees, customers
and communities. Thus, the strategy, being comprehensive in nature,
defines the business in which the organisation plans to operate. Cor-
N
porate-level strategies are basically formulated to achieve the long-

term organisational objectives. Therefore, these strategies are also
known as grand strategies or master strategies.
Usually, the top management of an organisation formulate corpo-

rate-level strategies. These strategies are mainly concerned with
decisions regarding the product or service to produce and the geo-
graphical location to target. Corporate-level strategies give a direction
to an organisation to achieve its objectives. In addition, these strate-
gies determine resource allocation, such as how to allocate cash and
equipment among various departments. Decisions regarding expan-
sion policies or addition of new products also fall within the area of
corporate-level strategies. Corporate-level strategies also involve de-
cisions regarding establishing relationships with other organisations
and competing with rival organisations.

n o t e s
Corporate-level strategies deal with the following major issues:

Defining the type of business that an organisation should venture
into
Dividing the resources among different operations of the organi-
sation
Transmitting and transferring resources from one set of business-
es to another
Selecting and managing the investment portfolio of an organisa-
tion
Deciding the nature and level of diversity required to exist in a
particular business
Determining the boundaries of the organisation, and how these
S
boundaries should put impact on relationships among various
parts of the business and other interest groups
Determining on which basis the organisation should function.
IM
Should it be cooperative basis, mutually beneficial relationships
or business?
There are four types of generic corporate-level strategies at the dis-

posal of an organisation. Figure 3.1 shows these four strategies:
M
Expansion Strategies
Stability Strategies
N
Corporate-level Strategy
Retrenchment Strategies
Combination Strategies
Figure 3.1: Types of Corporate-level Strategy
Let us discuss about these four corporate-level strategies in detail in

the next sections.
1. Corporate-level strategies are formulated to achieve the

___________-term organisational objectives.

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Activity
Prepare a report on various grand strategies with suitable exam-

ples from Indian business organisations.
3.3 EXPANSION STRATEGIES

Expansion means increasing the extent, the volume or the scope of
operations. Expansion strategies are the most common and popular
strategies adopted to accelerate the pace of growth of an organisation.
These strategies have a great impact on the organisation’s structure
and processes. They widen the scope of the organisation to expand
customer groups, customer functions and alternative technologies.
Expansion strategies are also known as growth strategies.
S
Expansion strategies aim at gaining control over the market and the
competitors. These strategies are formulated when an organisation
wants to increase its business horizon to tap opportunities available
IM
in the market. If an organisation exists in the business for a long time,
it can gain advantage from its experience and go for expansion strat-
egies. Similarly, if an organisation’s resources are lying idle, it may
utilise them for expansion purposes.
Expansion strategies can be further divided into various sub-strate-

gies, shown in Figure 3.2:
M
Expansion through
Concentration
N
Expansion through
Integration
Expansion through
Diversification
Expansion Strategies
Expansion through
Cooperation
Expansion through
Internationalisation
Expansion through
Digitalisation
Figure 3.2: Types of Expansion Strategy
Let us discuss these types of expansion strategy in next sections in

detail.

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3.3.1 EXPANSION THROUGH CONCENTRATION
Expansion through concentration involves attaining expansion by

combining the resources in one or more area of the organisation’s
business. This is also known as focus or intensification strategy, im-
plying that an organisation would like to concentrate more on the
business that it is already doing. It involves the investment of larger
resources in a product line for an identified market, with the help of
a proven technology. The expansion can be followed by adopting the
following means:
Market penetration: It implies selling more products in the same
market.
Market development: It refers to identifying the new markets for
selling the existing products.
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Product development: It refers to selling new products in the ex-
isting markets.
Expansion through concentration has the following advantages:

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Involves minimum organisational changes, thus, it is less threat-
ening
Enables an organisation to master in one or a few businesses and
gain specialisation in them
Focuses intensely on the available resources and creates condi-
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tions to develop a competitive advantage

Helps managers to deal easily with problems as they are already
familiar with the type of problems
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Despite the advantages, expansion through concentration strategies

suffers from various limitations, which are as follows:
Highly concentrated: Concentration strategies are highly depen-
dent on the industry; thus, adverse conditions in an industry can
affect organisations. For instance, if the textile industry is hit by
recession, it would be difficult for an export house dealing only
with cloth material to avoid the impact of recession.
Doing a known thing intensely: It creates organisational inertia.
Employees may not sustain interest and may not perceive work as
a challenge, resulting in decreased output.
Cash flow problem: The strategy often results into a cash flow
problem that makes the sustainability of an organisation difficult.
An organisation requires large cash inflows to expand while using
concentration strategies. This is because; these strategies focus on
mastering one business. In order to obtain in-depth knowledge of
business and expertise, organisations require huge cash inflows
at the growth stage. However, once the organisation achieves the
required expertise and market position, it does not require that

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much of cash inflow. Now due to focus on one business, the or-
ganisation neither plans to expand further nor utilises the options
to invest its surplus cash. In this scenario, the problem of surplus
cash flow arises. The excess cash situation, with limited opportuni-
ties for profitable investment is probably one of the major reasons
that organisations in a mature market begin to diversify (as con-
centration strategy is no more profitable).
Other threats: They include factors, such as product obsolescence
and emergence of newer technologies, which can become a threat
to organisations following expansion through a concentration
strategy.
3.3.2 EXPANSION THROUGH INTEGRATION
Expansion through integration is performed by combining activities
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or functions of the business with no change in customer groups. This
is done through a value chain, which consists of a number of inter-
linked activities (performed by an organisation) ranging from the pro-
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curement of raw materials to the marketing of finished goods. Thus,
an organisation may move up or down the value chain to integrate
activities so that the needs of the existing customers could be fulfilled
more efficiently. Thus, expansion through integration widens the
scope of an organisation’s growth.
While following expansion through an integration strategy, an organ-

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isation can move either vertically or horizontally in the value chain to

concentrate more specifically on customer groups. The two types of
integration strategies are explained as follows:
1. Vertical integration: This type of integration is carried out
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with the purpose of supplying inputs, such as raw materials or

distributing the final product to customers. Vertical integration
is further divided in backward and forward integration. In
backward integration, the organisation becomes its own supplier;
whereas in forward integration, the organisation takes control
of distributing the products. For example, if an automobile
organisation buys its tyre supplier organisation, it is a backward
integration. On the other hand, if a wholesaler purchases a
retailing outlet to directly sell products to end-costumers; it is a
forward integration.
2. Horizontal integration: It refers to a situation when an
organisation merges with or acquires other organisations serving
the same customers, with the same or similar products, and
adopting the same marketing process. Horizontal integration
increases the size and profits of an organisation by increasing
its market share. An example of horizontal integration can be
a pizza restaurant expanding its product range by acquiring a
hamburger chain.

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3.3.3 EXPANSION THROUGH DIVERSIFICATION
Expansion through diversification involves an extensive change in the

business of an organisation in terms of customer functions, customer
groups or alternative technologies. In simple words, it means diversi-
fication into related or unrelated businesses. Under the diversification
strategies, an organisation launches new products, serves new mar-
kets, or does both simultaneously. There are two types of diversifica-
tion strategies:
1. Concentric diversification: This type of diversification strategy
is taken by an organisation that expands in business, related to
its existing business. This is also known as related diversification.
For example, an organisation, selling household electrical
equipment, may diversify its business to kitchenware appliances
to serve the same set of consumers.
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2. Conglomerate diversification: It implies a strategy that
requires taking up activities unrelated to the existing business
of an organisation. This is also called unrelated diversification.
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Conglomerate diversification is practiced in organisations
when they have excess surplus capital. For example, ITC is into
numerous unrelated businesses, such as agri-business, hotels,
paperboards and packaging.
Diversification strategies help an organisation to:

Minimise the risks by spreading it over several businesses
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Capitalise strengths and minimise weaknesses

Maximise the returns by investing into profitable businesses
Assist in migrating from a stagnant business to a lucrative
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business
Stabilise returns by avoiding economic fluctuations
Reap the benefits of synergies
Diversification strategies may suffer from the following drawbacks:

Strategy implementation demands a high level of managerial, op-
erational and financial competence
It also requires an organisation to hire workforce with wide a vari-
ety of skills, as different businesses necessitate different skills for
performing different tasks
The strategy may create imbalance in one or more businesses of
an organisation due to lack of focussed approach
The strategy implementation may increase the administrative
costs of managing, integrating and controlling different businesses

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3.3.4 EXPANSION THROUGH COOPERATION
Expansion through cooperation refers to the mutual cooperation

between organisations belonging to the same industry to achieve a
shared objective. For example, if an organisation works in cooperation
with other organisations, it can establish a favourable position in the
industry relative to its competitors. Cooperation strategies available
to organisations are discussed as follows.
MERGERS AND ACQUISITIONS
Mergers and acquisitions have become popular strategies in the last

few decades to expand the scope of business for an organisation. A
merger can be defined as a combination of two or more organisations,
in which both the organisations are dissolved and their assets and lia-
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bilities are combined to form a new business entity. It is also referred
to as an agreement in which one organisation obtains the assets and
liabilities of the other in exchange for shares or cash. Thus, in merg-
ers, organisations pool their resources together to gain a competitive
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advantage.
An acquisition refers to the process of gaining partial or full control of

one organisation by another. In most cases, acquisitions are unfriend-
ly in nature as one organisation tries to take over another organisation
by adopting hostile measures, which may not be in the interest of the
acquired organisation.
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The main reason behind mergers and acquisitions is the desire of or-
ganisations to increase their market power and gain synergy. Various
types of mergers that help in expanding the size of organisations are
as follows:
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Horizontal mergers: This type of merger takes place when two

or more organisations in the same business activity merge. The
merger results in a larger organisation and large-scale operations
for the merged organisation. Organisations may merge horizon-
tally by sharing their resources and skills. For example, an organ-
isation in computer hardware manufacturing may merge with the
organisation having the same business.
Vertical mergers: This type of merger occurs between two or
more organisations having different stages of business in the same
industry. For instance, organisation A, which is involved in the
manufacturing of certain products, merges with organisation B,
which sells the products of organisation A. In such a case, the ver-
tical merger has taken place between the two organisations. The
reasons for vertical mergers are reducing the costs of communica-
tion, coordinating production, and better planning for inventory
and production.

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Concentric mergers: It refers to a combination of two or more re-

lated organisations with similar production or distribution tech-
nologies. For example, a merger between the motorcycle manufac-
turer and a car manufacturer.
Conglomerate mergers: In this type of merger, two or more unre-
lated organisations merge horizontally or vertically. For example,
the merger of a fast-food outlet with a cloth manufacturing organ-
isation is a conglomerate merger.
Mergers and acquisitions can achieve the following results:

Increase the value of the organisation’s stock
Increase the growth rate by making wise investments
Balance and diversifying the product lines
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Reduce competition
Avail tax concessions and benefits
Acquire competence and capabilities
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Enter new markets for increasing market share
Exhibit
Examples of Biggest Mergers and Acquisitions Deals in India

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1. Vodafone- Hutchison Essar

Date Acquisition Value
February, Vodafone, the world’s largest mobile Valued at $10.1
2007 telecommunication organisation, billion
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acquired 67% control on Hutch

Essar, India’s leading cellular service
provider.
2. Hindalco- Novelis
February, Birla’s Hindalco, an aluminum and Valued at $6
2007 copper major, acquired Novelis, a billion
Canadian organisation in an all cash
deal. This is the second largest glob-
al acquisition after Tata- Corus.
3. Ranbaxy-Daiichi Sankyo
June, 2008 An Indian pharmaceutical organisa- Valued at $4.5
tion, Ranbaxy Laboratories Limit- billion
ed, was acquired by Daiichi Sankyo,
a Japanese pharmaceutical organi-
sation by acquiring 63.92% stake of
Ranbaxy.

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4. HDFC Bank-Centurion Bank of Punjab

February, 2008 HDFC bank merged with Centu- Valued at $2.5
rion Bank of Punjab by approving billion
a swap ratio of 1:29, which states
that one share of HDFC bank is
exchanged for every 29 shares of
Centurion Bank of Punjab. How-
ever, the combined entity is named
as HDFC only and has become the
largest private sector bank in India.
JOINT VENTURES
Joint Ventures (JVs) are a combination of two or more organisations
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that want to attain similar objectives for a specific period. A JV is usu-
ally a business agreement in which the concerned parties form (for a
specified time period) a new entity and new assets, by contributing
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equity.
Various reasons for forming a JV are as follows:

Access to new markets and distribution networks
Increased capacity
Sharing of risks and costs with a partner
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Access to more resources, including specialised staff, finance and

technology
Four situations that necessitate the formation of a JV are:

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1. Carrying on a business activity alone becomes unprofitable for

an organisation
2. Sharing the business risk becomes essential
3. Coming together of two organisations results in the creation of
unique competence or expertise
4. Existing political, legal, economic or social hurdles do not allow
an organisation to set up a business alone
Thus, JVs prove effective when an organisation seeks to share the risk
and minimise its costs. In addition, they provide a distinctive compe-
tence to the organisation.
Besides having several benefits, JVs also have few drawbacks, which
are:
Partners may have different objectives for the JV, which may ulti-
mately result in conflict generation

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Imbalance in levels of expertise, investment or assets brought into

the venture by the different partners may also lead to conflicting
situation
Differentcultures and management styles of different partners in
the JV may result in poor integration and co-operation
Resentment among the partners, as they have to adapt to the
changes. This often leads to insufficient leadership and support in
the early stages of JV
Consider the following examples of joint ventures:

BalajiTelefilms Limited entered into a joint venture with Star
Group Limited to create a television network of regional language
general entertainment channels that target the South Indian mar-
ket.
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Tata Tea has a joint venture with the Chinese state owned organi-
sation, Zhejiang Tea Import & Export Company, which is the larg-
est green tea exporter of China
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STRATEGIC ALLIANCES
A strategic alliance is a mutual agreement between two or more or-

ganisations. According to Yoshino and Rangan, A strategic alliance is
a partnership between two or more organisations that unite to pursue a
set of agreed upon goals, but remain independent subsequent to the for-
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mation of the alliance to contribute and to share benefits on a continuing

basis in one or more key strategic areas.
Organisations enter into the strategic alliance with their suppliers or

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competitors to gain competitive advantage. These alliances enable or-

ganisations to enter new markets, obstruct competitors and generate
higher revenues. The benefits of strategic alliances are as follows:
Help organisations to enter into new markets by forming partner-
ship with other organisations
Reduce the manufacturing costs by pooling resources to utilise
them efficiently
Develop technological capabilities by sharing technological exper-
tise
There are four types of strategic alliances:

1. Pro-competitive alliance: It involves the relationship between
inter-industry alliances, such as manufacturers, suppliers or
distributors. These alliances offer the advantages of vertical
integration.
2. Non-competitive alliance: It involves the intra-industry
partnerships between non-competitive organisations. In non-
competitive alliance, the areas of activities of organisations

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do not coincide with each other. Thus, there is no competition

between them.
3. Competitive alliance: It refers to a partnership between two or
more rival organisations. There can be intra-industry or inter-
industry competitive alliance. Many foreign organisations enter
into strategic alliance with local competitive organisations.
4. Pre-competitive alliance: It implies a partnership between two
or more organisations from unrelated industries. This alliance
is formed to work on different activities, such as development
of new technology, new product or new idea. Joint research
and development activities are an example of pre-competitive
alliance.
According to Hamel and Prahalad, organisations form strategic alli-
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ances because of the following purposes:
Sharing the cost and risks associated with the new developments
of products or processes: For example, the alliance between Boe-
IMing and a number of Japanese organisations to build 767 aircraft
was the Boeing’s attempt to share the costs of manufacturing air-
crafts.
Combining skills that cannot be developed independently: For
example, in 1990, AT&T entered into an alliance with NEC Cor-
poration of Japan to trade technological skills. AT&T gave NEC
computer-aided design (CAD) chips, and NEC gave AT&T access
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to its advanced logic chips.

Facilitating easy entry into foreign markets: For example, Mo-
torola found it difficult to enter the Japanese cellular phone mar-
ket because of high trade barriers. Thus, it formed alliance with
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Toshiba of Japan to build microprocessors.
The disadvantage of the strategic alliance is that it gives competitors a

low-cost route to new technology and markets.
Exhibit
Examples of Strategic Alliance
A strategic alliance can be formed in different ways, depending

upon the nature and motive of the alliance. Different strategic alli-
ances are discussed as follows:
Licensing: It implies an alliance in which an organisation (li-
censer) grants rights of its intangible property, such as patents,
inventions, formula, design and process, to another organisation
(licensee) for a specific time. The licenser receives fees from the
licensee to use its property rights. For example, in December
2007, Canada’s BioMS medical group entered into a licensing

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and development agreement with pharmaceutical giant Eli Lil-

ly for a novel treatment for multiple sclerosis. BioMS granted
Eli Lilly the rights to MBP8298 (dirucotide) for the treatment
of secondary progressive MS (SPMS) in exchange for an $87
million upfront payment, milestone payments and escalating
royalties on sales.
Contract manufacturing: It implies an alliance in which the
production of goods is outsourced to some other organisation.
One organisation decides the design and specifications, but an-
other organisation does the production. For example, Nike fol-
lows the strategy of contract manufacturing, where it decides
the designs, but the manufacturing of the product is outsourced
to another organisations.
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Source: www.businessinsider.com
Turnkey project: It implies an alliance in which one organisa-

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tion takes the complete responsibility of setting up a new organ-

isation, starting from the planning of infrastructure to the train-
ing of personnel, on behalf of a client organisation. After the
completion of project, the newly set up organisation is handed
over to the client organisation for starting the actual operations.
These types of projects are called turnkey projects. For exam-
ple, a contractor builds a hospital installed with high technology
medical equipment and hands over the premises to the owner
after completion.
Franchising: It refers to a long-term commitment in which one
party (franchiser) sells its intangible property rights to other
party (franchisee). In addition to selling property rights, the
franchiser supports the franchisee in setting up the business
and insists the franchisee to follow the rules and regulations
made by the franchiser. Because of this, the franchiser receives
a royalty from the franchisee. For example, McDonald’s ex-
pands its operations in foreign countries through franchising.

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Source:www.cnbc.com
McDonald’s has set certain rules and regulations that ev-
ery franchisee is bound to follow to retain the outlet. This is
done to maintain the brand image and product/service qual-
ity across nations, irrespective of geographical constraints.
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3.3.5 EXPANSION THROUGH INTERNATIONALISATION
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Expansion through internationalisation refers to an expansion strat-
egy that helps organisations to perform their operations internation-
ally. Organisations need to devise their strategies to enter into foreign
markets. Today, many organisations are internationalising their op-
erations because of high competition in domestic markets. Organisa-
tions that plan to operate in international markets need to consider
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various issues, such as government regulations as well as economic,

social and legal forces that shape the international markets. Thus, in-
ternational strategies require a different strategic perspective than
domestic strategies. According to Bartlett and Ghoshal, there are
four types of international strategies, which are as follows:
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1. International strategy: This strategy is used to create value by

transferring products and services to foreign markets where
these products and services are not available. This strategy
is often referred to as an exporting strategy as products are
manufactured in the company’s home country and send to
customers all over the world. Thus, such companies have little
requirement for local adaption and global integration. Take
example of large wine producers from countries, such as France
and Italy who follow this strategy for acquiring the market share
in the foreign market. Similarly, United Parcel Service, Inc.
(UPS), which is the world’s largest package delivery company
(based in Seattle, Washington), follows this strategy to serve its
customers in over 220 countries and territories.
2. Multi-domestic strategy: This strategy helps organisations to
customise their operations according to the local conditions of
different countries. A multi-domestic strategy, also known as
high-level of local responsiveness, matches products and services
according to the conditions prevailing in the international
country, where the organisation intends to operate. Take the

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example of MTV, an American cable and satellite television

channel that customises its programmes aired on its channel
within the number of countries, including India, New Zealand,
Pakistan, etc. Similarly, the food company H.J. Heinz customises
its products to match the preferences of local customers. Heinz,
while launching its products in India, offered a version of its
ketchup that does not include onion and garlic, as some Indians
do not eat these two ingredients.
3. Global strategy: It implies a low-cost approach that aims to
reap the benefits of the experience curve. In a global strategy,
organisations offer standardised products and services across
different countries. Though, there could be some minor
modifications to products/services (depending upon the market
variations), a global strategy focuses on the need of gaining
economies of scale and therefore, offers essentially the same
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products/services in each market. For example, Microsoft
offers same software programmes around the world but adjusts
them to match local languages. Similarly, consumer goods
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manufacturing company Proctor & Gamble and pharmaceutical
company Pfizer can also be categorised as global companies as
they aim at creating standardised global brands.
4. Transnational strategy: It involves both low-cost and high-level
of local responsiveness approaches. This type of strategy requires
a creative approach for managing production and marketing
goods and services.
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A transnational strategy takes a middle path between a multi-

domestic and a global strategy. The strategy focuses on offering
standardised products/services by keeping in mind local
preferences within various countries. For example, fast-food
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chains, such as McDonald’s and KFC focus on the same brand

names and core menu items around the world. However, they
take into consideration the local taste and preferences while
developing products/services. McDonald’s, for example, follows
a standardised approach while running its operations and adapts
its products to local tastes and preferences. In India, McDonald’s
uses Indian spices in its products as per local demands and
preferences. Their Chicken Maharaja Mac and BigSpicy Paneer
Wrap are customised to Indian tastes and preferences. Similarly,
in France, the menu includes bagels, seasoned red potato wedges
with sauce, cakes, pastries, scones and croissants. These are not
available in the United States. In addition, drinks like Dr. Pepper
and root beer are not offered in France, but in the United states.
Unilever is another example of fast moving consumer goods
(FMCG) company that follows transnational strategy to offer its
products in all over the world.
Thus, international strategies offer various strategic alternatives for

expansion and provide rewards in the form of lower costs, increased

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sales and higher profits. Expansion through internationalisation of-

fers the following advantages:
Realises the economies of scale by expanding sales volume
Develops valuable competencies and skills by operating in global
markets and working on different business models
Expands local markets to global markets, which lead to increase in
organisation’s market share
Helps in the possession of valuable resources globally, which leads
to a competitive advantage for an organisation
Expansion through internationalisation also has certain disadvantag-

es, which are as follows:
Involves a higher risk related to the economic and political envi-
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ronment of foreign countries
Faces challenges of cultural diversity; for example, organisations
have to manage the employees of different cultural backgrounds
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Requires coordination between domestic and foreign operations,
which leads to high bureaucratic costs
Leads to higher costs because of differences in distribution chan-
nels
Involves trade barriers, such as tariffs, pricing restrictions or dif-
ferent standards for different countries
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Every organisation faces various issues that need to be solved before

entering into an international market. There are three basic strategic
decisions taken by organisations while going global. These decisions
are:
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1. Which international markets to enter: The organisation that

plans to go global needs to analyse which international market
to enter as different markets may serve different demands
of customers in different countries. Every market has its own
advantages, disadvantages and risks. This requires appraising
the market of different countries for knowing the benefits, costs
and risks involved. Based on the analysis, the organisation needs
to decide the most suited market for its business.
2. What should be the timing of entry in international markets:
The organisation should analyse whether it should be the first
mover or the last mover in entering a new international market.
3. What should be the scale of entry in international markets: An
organisation before entering into an international market requires
deciding the scale of entry. A small-scale entry implies investing
fewer resources and making fewer commitments; whereas a
large-scale entry implies making important commitments by
investing large resources. The large-scale entry tries to create
a major presence of organisation in a country; whereas a small-

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scale entry helps in reversing the decision if it comes out to be

unprofitable.
Thus, we can state that expansion through internationalisation is an

important strategy that is adopted by various organisations for global
operations.
Exhibit
Role of Regionalisation Strategy in International Operations
Many organisations lose the competitive edge by following a sin-

gle strategy worldwide. The best solution lies in regionalising the
strategy according to the cultural, political, legal, geographical and
economic environment. Regionalised locations attract more For-
eign Direct Investment (FDI), and help in expanding the overall
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economic activity of the region. To enhance their growth and prof-
itability, organisations such as Toyota, GE, and Walmart have incor-
porated the regionalisation strategy successfully.
IM
According to Ghemawat, Regionally focused strategies, used in con-
junction with local and global initiatives, can significantly boost an
organisation’s performance. According to him, successful organisa-
tions adopt five types of regionalisation strategies, which are:
1. Home-based strategies: These are the strategies that involve
manufacturing goods in the home country and exporting
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them to nearby foreign countries. In a home-based strategy,

an organisation usually carries out research and development
in the country of origin. For example, for more than a decade,
Toyota has served its international clients through direct
exports.
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2. Portfolio strategies: These strategies help in building

international manufacturing facilities based at different
geographical regions. In a portfolio strategy, an organisation
sets its production facility outside the home region, but
reporting is done directly to the home base. It facilitates
a faster growth rate in the non-home region. Again, Toyota
is a good example of this strategy. It has developed its own
production system in North America, which is the most
prominent overseas market for the organisation.
3. Hub strategies: These strategies aim at building up a network
of different manufacturing and distribution facilities in
different geographical regions. HUB strategy helps in adding
values to the companies as it provides shared service within a
region to different countries.
4. Platform strategies: These strategies help in maintaining the
economy of scales and spreading fixed costs over different
geographical regions. While hubs help in spreading the fixed

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cost within a geographical region, platform strategies spread

the fixed cost across a geographical region. They help in
achieving economies of scale in terms of operations, design,
technology, and administration.
5. Mandate strategies: These are interregional mandates,
which include the assignment of specific products to different
geographical regions. Under this strategy, companies assign
certain regions broad mandate for performing certain roles
for the whole organisation.

3.3.6 EXPANSION THROUGH DIGITALISATION
Digitalisation refers to the digital coding of information. It enables in-

formation to be available efficiently, economically and widely within
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and outside organisations. In this way, it puts a significant impact on
the strategies of organisations. Digitalisation has guided the usage of
E-commerce, E-learning and E-banking. These developments have
created a new term for product category, called bitable or digitised
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products. For instance, books, magazines, newspapers and financial
services.
Digitalisation strategies used by organisations are as follows:

E-channel pattern: It involves a chain of relationships between
organisations and customers and between customers and their
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partners/suppliers. The following are four business models, possi-

ble in the E-channel pattern:
1. Transaction enhancement: It involves replacing the old
transaction method with advanced functional technologies
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to make marketing information (from the manufacturer or

distributer) available electronically. For example, Home Depot
introduced its first website as an informational tool to enable
customers to easily locate the nearest store.
2. E-channel compression: It implies using technology to reduce
the number of steps in the distribution and marketing through
e-channel. It eliminates redundant steps in the channel and
results in a more direct relationship between the customer
and the supplier. For example, Southwest Airline is one of the
pioneers that started selling tickets online by removing the
ticketing agent link in the chain.
3. E-channel expansion: It involves lengthening the legacy
channel. This approach is needed in a market where customers
desire several unrelated products/services. Take an example of
an automotive market, where a customer may need information
on a new car, used car, parts, car insurance or other products/
services. Finding information on each of these from a single
information source is difficult. Therefore, the role of online
infomediary or information broker becomes critical to such

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markets. Adding an online infomediary into the existing market

channel is an example of E-channel expansion.
4. E-channel innovation: The model develops new e-channels
to satisfy unmet customer needs online. The model is applied
to attract customers by pioneering new channels to satisfy
potential customer’s desires. Usage of computer-generated
postage (downloadable from the Internet) is an example of
e-channel innovation, where customers can buy postage online
by any electronic transfer of funds.
Click-and-brick pattern: When traditional organisations (brick-
and-mortar) adopt the new technology of new organisations (click-
and-order) to achieve greater productivity, it is called the click-and-
brick (C&B) pattern. Merrill Lynch, Toys “R” Us, Walmart, Barnes
& Noble are a few examples of brick-and-mortar companies that
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had transformed their traditional operations to support the digital
business model. At the same time, there are several Internet-based
companies, like eBay and Amazon that are building a real-world
physical channel in addition to the virtual one. Thus, the C&B pat-
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tern is becoming a hybrid online/offline business model, incorpo-
rated by both brick-and-mortar and click-and-order companies.
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Source: www.theverge.com
E-portal pattern: It involves intermediaries offering a set of ser-

vices to a specific group of users. For example, Yahoo, Google and
e-Bay are E-portals. They act as intermediaries between suppliers
and customers and offer value-added services.
E-market maker or net market pattern: It is an online interme-
diary that connects different buyers and sellers within a common
vertical industry like chemical or steel. E-market eliminates chan-
nel inefficiencies by combining offerings from different sellers or
by matching buyers and sellers in an auction. Thus, it facilitates
the real-time transfer of information, products and money.
Pure E-digital products pattern: It involves production, delivery
and consumption of products or services electronically. New in-

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novations in software, hardware and communications are revolu-

tionising our economy and resulting in the emergence of digital
goods business that provide digital content. Such businesses deal
with software, music, photos, videos and documents that can be
produced, delivered, consumed and licensed electronically.
2. In backward integration, an organisation becomes its own

supplier; whereas in forward integration, the organisation
takes control of distributing the products. (True/False)
3. ____________ can be defined as a combination of two or more
organisations, in which both the organisations are dissolved
and their assets and liabilities are combined to form a new
business entity.
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4. Which of the following type of strategic alliances involves
the relationship between inter-industry alliances, such as
manufacturers, suppliers, or distributors?
IM
a. Pro-competitive alliance
b. Non-competitive alliance
c. Competitive alliance
d. Pre-competitive alliance
5. ____________ strategy matches the products and services
M
according to the conditions prevailing in the international

country, where the organisation intends to operate.
6. Selling more products in the same market is termed as
____________.
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Activity
Sony Pictures Network India (SPN) has acquired Ten Sports Net-
work from Zee Entertainment Enterprises Limited (ZEE) and its
subsidiaries on 31 August 2016. Using the Internet, find details of
this business transaction. Write a short note on how this acquisition
would add South Asia’s leading sports network to SPN’s existing
portfolio of channels.
3.4 STABILITY STRATEGIES

Stability strategies are followed by an organisation in situations where
the organisation does not venture into new markets or launch new
products. It is a position where the organisation stops the expenditure
on expansion. Sometimes, an organisation attempts to maintain its
current position and focuses only on a marginal or incremental im-
provement in its performance by changing one or more of its business

n o t e s
operations. These changes could be in terms of customer groups, cus-

tomer functions, technology alternatives, etc. Thus, the strategy that
an organisation follows in such conditions to consolidate its position
in the industry (where it operates), is known as stability strategy.
The focus of stability strategy is to move carefully and slowly to help

an organisation in retaining its present position in the market. In the
stability strategy, organisations serve the same market with present
products using the existing technology.
In other words, the stability strategy sustains the moderate growth of

the organisation, in line with the existing trends. An organisation can
adopt a stability strategy either when the market condition is vola-
tile or highly competitive. Stability is also adopted in situations when
there is a lack of resources and expansion may be risky in nature. For
example, Steel Authority of India Limited (SAIL) opted for the stabil-
S
ity strategy because of overcapacity in the steel sector. SAIL concen-
trated on increasing its operational efficiency, rather than going for
expansion.
IM
Stability strategies are of three types, shown in Figure 3.3:
Stability
Strategy
M
Small
No Change Profit
Exploration
Strategy Strategy
N
Strategy
Figure 3.3: Types of Stability Strategy
Let us discuss all these types of stability strategy in the next sections.
3.4.1 SMALL EXPLORATION STRATEGY
A small exploration strategy is also known as a pause/proceed with

the caution strategy. It is a tactic employed by organisations to test the
grounds before moving ahead with a full-fledged corporate strategy. It
involves gauging new products/services and markets, exploring small
test markets and judging the reaction of customers. The main purpose
is to seep down the strategic changes at the organisational levels and
adapt the systems to new strategies.
Pause/proceed with the caution strategy is a temporary but a deliber-

ate and conscious attempt to delay major strategic changes to a time,
when the organisation is ready to move with rapid pace again. In In-

n o t e s
dia, the shoe market is dominated by shoe brands, such as Liberty

and Bata, with an increasing presence of international brands, such
as Nike, Adidas or Reebok. Not many of you might be aware that Hin-
dustan Unilever Limited (HUL), better known for manufacturing fast
moving consumer goods (FMCG), produces a fair quantity of shoes as
well. These shoes are generally exported. HUL followed the pause/
proceed with the caution strategy before deciding to focus on the ex-
port market. In the late 2000, HUL sold a few thousand pairs in the
Indian cities. This was done to ascertain the market reaction, before
venturing into a sector (exports) having a huge potential.
3.4.2 NO CHANGE STRATEGY
A no change strategy is followed by organisations to continue with the

present position of growth. It involves maintaining the existing strate-
S
gies without doing anything new. In other words, a no change strategy
can be characterised by an absence of strategy, since the organisation
does not find it worthwhile to alter the present strategy. The reason
behind the no change strategy could be the absence of opportunities
IM
or threats in the external and internal environment. In addition, there
may be no major strengths or weakness of an organisation for which it
needs to form any strategy.
The no change strategy is generally followed by organisations, which

are small. These organisations prefer to operate in the niche market,
M
and offer products and services based on time-tested techniques.
3.4.3 PROFIT STRATEGY
An organisation cannot survive for long by following the ‘no change

N
strategy’. A profit strategy is usually followed when a few changes in

the current strategy become necessary. When the problems faced by
the organisation are estimated to last only for a short while, it tries to
sustain profitability by adopting the profit strategy.
In the profit strategy, an organisation, in order to sustain its profit-

ability, takes measures, such as reducing investment, raising prices
and increasing productivity. Profit strategy is followed when an or-
ganisation is unsure of external markets and looks for the right time
to practice another strategy.
The profit strategy is also adopted when an organisation perceives that

the problems are short-lived and can be eliminated anytime. These
problems may relate to government attitude, competitive pressures
or industry downturn. The measures that an organisation adopts are
basically artificial measures that lead to profitable situations. Thus,
it can be said that such strategy can work only if problems are short-
term in nature.

n o t e s
7. In which of the following strategy organisations serve the same

market with present products using the existing technology?
a. Liquidation
b. Diversification
c. Stability
d. Turnaround
8. A ____________ strategy is also known as pause/proceed with
the caution strategy.
Activity
S
Using the Internet, identify why Steel Authority of India, NTPC
and ONGC focused on adopting stability strategies. List the possi-
ble reasons in your worksheet.
IM
3.5 RETRENCHMENT STRATEGIES
A retrenchment strategy is a corporate-level strategy that aims to re-
duce the size or diversity of organisational operations. At times, it also
becomes a means to ensure an organisation’s financial stability. This
M
is done by reducing the expenditure. A retrenchment strategy is de-

signed to fortify an organisation’s basic distinctive competence.
In simple terms, a retrenchment strategy involves abandonment

operations that are no longer profitable for the organisation. It also
N
includes withdrawal of the business from markets where even sus-

tenance is difficult. For example, a corporate hospital that generates
highest revenue from the cardiology department and very less reve-
nue from the neurosurgery department, may decide to focus only on
cardiology and eventually shut down the neurosurgery department to
maximise the revenue.
Besides, a retrenchment strategy also results in reduction of the

number of employees, and sale of assets associated with discontin-
ued product or service line. At other times, it involves restructuring
of debt through bankruptcy proceedings; and in most extreme cases,
liquidation of the organisation.
A retrenchment strategy aims at the contraction of an organisation’s

activities to improve performance. It is implemented to find out the
problem areas and the steps to resolve them. This strategy is adopted
when an organisation suffers continuous losses. Organisations follow a
retrenchment strategy for various reasons. These include divestment
of a business, or the strategic mismatch of a particular business with
an organisation’s core business. In addition, a retrenchment strategy

n o t e s
is also followed when a particular business is so small that it does not

make any sizable contribution to the total earnings of the organisa-
tion. Basically, retrenchment strategies are a response to decline in
industries and markets. Most of the external factors that lead to such
decline are as follows:
New dominant technologies
New business models
Adverse government rules and regulations
Changing customer needs and preferences
Emergence of substitute products
Demand saturation
Apart from the external factors, there are several internal factors that
S
may cause decline in industries and markets. Some of the major inter-
nal factors leading to decline are as follows:
Ineffective top management
IM
Inappropriate strategies
Excess liabilities
High costs
Ineffective sales and marketing
M
Poor quality of functional management

Wrong organisational design
The consequences of decline are often seen in several problems faced

by an organisation. The major consequences of decline are:
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Falling sales
Increasing debt
Diminishing profitability
Shrinking market share
Loosing goodwill and credibility
Declining cash flow
These consequences may give rise to the following situations:

Non-recoverable situation: It refers to a situation where there are
no chances of recovery for the organisation. In this, there is no
scope of improvement as costs are increasing and the demand of
products is declining.
Temporary recovery situation: It involves a recovery for a minor
period. In this situation, repositioning of the product, cost reduc-
tion and revenue generation is possible.

n o t e s
Sustained survival situation: It implies a situation where a little

potential for growth is possible. The industry may be on the verge
of slow decline.
Sustained recovery situation: It means a situation where long-
term recovery is possible as decline is caused by the internal
factors rather than external factors. It is normally implemented
through new product development or market repositioning.
Retrenchment strategies are largely governed by the preceding con-

sequences of organisational losses. Retrenchment strategies are of
three types, which are shown in Figure 3.4:
Retrenchment
S
Strategies
Turnaround Divestment Liquidation

IM
Strategies Strategy Strategies
Figure 3.4: Types of Retrenchment Strategies
The next sections explain these three retrenchment strategies in detail.

M
3.5.1 TURNAROUND STRATEGIES
Turnaround strategies are defined as a set of strategies that help in

managing, establishing, funding and fixing a distressed organisation.
N
These strategies aim at reversing the negative trend and turning

around the organisation to profitability. In other words, turnaround
strategies help an organisation to regain satisfactory levels of prof-
itability, cash flow and liquidity. There are certain conditions that
necessitate the usage of the turnaround strategy if the organisation
wants to survive. Some of the major conditions for turnaround strate-
gies are as follows:
Declining revenues/market share
Persistent negative cash flow
Negative profit
High turnover of employees
Lack of adequate resources
Poor execution of projects
uncompetitive products/services
Burden of high debt
Insufficient financial control

n o t e s
An organisation that faces one or more aforementioned conditions is

often declared as a ‘sick organisation’. The management of the turn-
around often involves replacing the existing team, specially the Chief
Executive Officer (CEO), or merging the sick organisation with a
healthy one. When the CEO is replaced by another, the new CEO fol-
lows one of the following two turnaround approaches:
Surgical approach: The CEO following the surgical turnaround
approach follows a tough attitude. He/she may quickly assert his/
her authority by issuing orders for changes, firing employees,
closing down plants and divisions, changing the product mix, con-
trolling marketing and financial activities, etc. He/she may keep
following this approach until the business starts showing the signs
of turning around.
Non-surgical or humane approach: The CEO following the
S
non-surgical turnaround approach focuses on understanding
problems, eliciting opinions, adopting a conciliatory attitude and
coming to negotiated settlements. This approach focuses majorly
on behavioural change and improvement in the work culture and
IM
employee morale.
Apart from this, turnaround strategies, in order to be successful, also

require to focus on short-term and long-term financing needs along
with other strategic issues. The action plan for turnaround should in-
clude:
M
Analysing product, market, production process, competition, etc.

Understanding the market place and production logic
Implementing plans based on set-targets, feedback and remedial
action
N
3.5.2 DIVESTMENT STRATEGIES
A divestment strategy is another form of retrenchment strategy and

is used to downsize the scope of a business by selling or liquidating a
portion of the business. This strategy is a part of the restructuring plan
and is practiced when a turnaround has been attempted and proven
a failure. This strategy is also called a divestiture or cutback strategy.
The alternative of this strategy is harvesting strategy, which includes a
process of gradually letting an organisation wither away in a carefully
controlled and standardised manner.
The reasons for the adoption of the divestment strategy are as follows:
Predicting that continuity of the business would be unviable
Increasing financial problems because of negative cash flows
Increasing competition and inability of the organisation to cope
with it

n o t e s
Mismatching of resources in case of mergers and acquisitions; it

happens when the resources of one organisation are not useful for
the other organisation
Failing to invest in technological advancements
Getting an opportunity to invest in a better alternative rather than
in an unprofitable business
The following two are choices available to an organisation for divest-

ment:
1. Divesting a part of an organisation to make it financially independent.
However, partial ownership is retained by the parent organisation
2. Selling an organisation completely
S
Exhibit
Examples of Divestment Strategies
Asian Paints, India’s largest paint manufacturer, divested its stake

IM
in Australian operations, in 2007. The Asian Paints spokesperson
said the operations in Queensland were small and not expected to
make any significant impact in the company’s performance.
M
N
Source: www.thebrandingsource.com
Philips divested its chip division called NXP in 2006, because

of the volatile and unpredictable nature of the chip market that
led to stock fluctuations.
Source: www.googleplus.com

n o t e s
3.5.3 LIQUIDATION STRATEGIES
Liquidation strategies are the most unattractive and severe retrench-

ment strategies, as the strategies involve closing down an organisation
and selling its assets. It can be referred as the last resort for the organ-
isation. For example, Punjab Wireless Systems Limited was ordered
to wind up its business under Section 433 of the Companies Act 1956,
by the High Court of Punjab and Haryana in 2008. The organisation’s
inability to discharge its debts and liabilities was the reason behind
this decision.
Selling assets for implementing a liquidation strategy may be difficult

because of the difficulty to find buyers. According to Companies Act,
1956, liquidation or winding up may be done in the following three
ways:
S
Compulsory winding up under the supervision of the Court
Voluntary winding up
Voluntary winding up under the supervision of the Court
IM
Exhibit
Disinvestment of Scooters India Limited (SIL)
Lambretta was a line of scooters originally manufactured in Milan,

M
Italy. In 1972, the Indian government bought Lambretta’s Milanese

factory, and created Scooters India Limited (SIL). SIL, a state run
enterprise based in Uttar Pradesh, bought the entire manufactur-
ing and trademark rights of Lambretta. It started commercial pro-
duction of scooters for the domestic market, under the brand name
N
of Vijai Super. In addition, SIL also produced Lambretta for the

overseas market. During the financial year 1980-81, SIL produced
around 35,000 scooters. However, by 1987, the figure had dropped to
around 4,500 units. By 1997, the scooter production came to a halt.
Source: www.retrowriteup.com

n o t e s
In March 2009, SIL was declared sick, and went to the Board for
Reconstruction of Public Sector Enterprises (BRPSE). As of 2009-
10, the organisation suffered a net loss of Rs. 22.03 crore. The or-
ganisation was facing several problems of inherent inefficiency, low
productivity, old plant technologies and an aging workforce. The
situation worsened when SIL was unable to pay even the employ-
ees’ salaries, and other statutory dues. Finally, the government de-
clared to sell its entire 95 per cent stake.
9. A ______________ strategy involves the abandonment of those

operations, which are no longer profitable for the organisation.
S
10. A divesting strategy includes a process of gradually letting
an organisation wither away in a carefully controlled and
standardised manner. (True/False)
11. Which of the following is the most unattractive and severe
IM
retrenchment strategy for closing down an organisation and
selling its assets?
a. Turnaround b. Divestment
c. Harvesting d. Liquidation
M
Activity
Using the Internet, find some real-life examples of organisations

that have followed a retrenchment strategy for their product or ser-
N
vice. Try to find out the reasons behind it. Make a report on it.
3.6 COMBINATION STRATEGIES

Combination strategies are a mixture of stability, expansion or re-
trenchment strategies. They are also called mixed or hybrid strategies
and may be applied in an organisation either at the same time in dif-
ferent businesses or at different times in the same business.
It is not always possible for an organisation to adopt a single strategy.

The functioning of every organisation is complex; therefore, they need
to adopt a combination of different strategies for the achievement of
organisational objectives. For instance, an organisation cannot follow
a stability strategy for a very long period; it has to think about the ex-
pansion plans in the end.
Combination strategies are of two types, which are explained as follows:

1. Simultaneous combination: It involves using the strategy
at the same time, but in different businesses. For example, an

n o t e s
organisation adopts expansion strategies in all its businesses at

the time of market boom.
2. Sequential combination: It refers to using the strategy at different
times in the same business. For example, an organisation adopts
various strategies, such as stability, expansion, and retrenchment
for a department as per the business cycle.
There could also be a third type of combination strategy, which com-

bines both simultaneous and sequential strategies. Combination strat-
egies are mostly used in large organisations because no single strategy
is sufficient for such organisations.
12. If an organisation adopts various strategies, such as stability,
S
expansion, and retrenchment for a department as per
the business cycle, then it is following ________________
combination strategy.
IM
Activity
ITC Ltd. and Aditya Birla Group of Companies are known for using
a combination of different strategies in various forms. Using the
Internet, identify how the two corporate giants use different strat-
egies for their different business units. Prepare a report based on
M
your findings.
3.7 BALANCED SCORECARD

N
After formulating a corporate-level strategy, it is important for the top

management to articulate the strategy properly to the organisation
and its stakeholders. However, it is not an easy task as implementing a
strategy can often be more difficult than formulating a strategy. Many
a time, organisations find it difficult to follow a number of strategies as
they turn out to be either hard to understand or unrealistic in nature.
Often, long-term strategies fail to associate with ground-level employ-
ees. This is because most employees are not able to envision the fruits
of such strategies, as they are concerned short-term performance and
results.
In addition, different departments and functional areas of an organi-

sation may interpret the same strategy in different ways, and if their
efforts are not co-ordinated, it may result into a disastrous situation.
Thus, you can say that if an organisation fails in articulating its corpo-
rate vision to the employees and other stakeholders properly, it could
not achieve its corporate objectives. This also demands linking the ob-
jectives to organisation’s performance to identify whether the efforts
are made in direction of achieving the corporate strategy.

n o t e s
In order to align their day-to-day decisions with a corporate strategy,

organisations take the help of a planning system, called a Balanced
Scorecard. A Balanced Scorecard is a value-based management tech-
nique, developed by David P. Norton and Robert Kaplan in the late
1980s. The purpose of the Balanced Scorecard is to translate strat-
egies into performance measures that uniquely communicate the
corporate-level vision to the organisation. According to Norton and
Kaplan, Balanced Scorecard is a tool that helps an organisation to
articulate its strategy.
There are very few organisations that are actually able to effectively
utilise their corporate-level strategies to operate at maximum efficien-
cy. With the help of the Balanced Scorecard, a business can under-
stand the cause-and-effect relationships among the key performance
drivers and identify their association with the strategic outcomes. Bal-
S
anced Scorecard works as a framework for measuring organisational
performance using a set of four performance measures or perspec-
tives, which are:
IM
1. Financial perspective: It is used to answer the question, “How
should we look to our stakeholder?” The perspective measures
the value that the selected strategy provides to its stakeholders.
It checks performance in terms of revenue growth, cash flows,
profitability, return on investment, stock price, shareholder
value, etc.
M
2. Customer perspective: It is used to answer the question, “How

should we look to our customers?” The perspective focuses on
customers’ needs and wants, satisfaction level, market share and
growth in the market share. It checks performance in terms of
service levels, satisfaction ratings, delivery reliability, value of a
N
loyal customer, customer retention, frequency of repeat business

and percent of sale from new goods and services.
3. Innovation and learning perspective: It is used to answer
the question, “How will we sustain our ability to change and
improve?” The perspective is used to form a basis for future
success of the organisation by directing focus on organisation’s
people and infrastructure. Key performance measures include
intellectual and research assets, time to develop new products
and services, number of improvement suggestions by each
employee, market innovation, employee satisfaction, revenue per
employee, training hours per employee and skill development.
4. Internal perspective: It is used to answer the question, “At
which business process we must excel?” the perspective pays
attention on the performance of the key internal processes that
run the business. The performance measures include quality
levels of products and services, productivity, flow design and
time, demand flexibility, safety, asset utilisation, rework, cost and
environmental quality.

n o t e s
The Balanced Scorecard is called ‘balanced’ because it uses more

than financial measures to assess performance. This helps the organ-
isation to better focus on long-term success as operational excellence
is important in all four performance perspectives. According to Ka-
plan and Norton, The balanced scorecard retains traditional finan-
cial measures. But financial measures tell the story of past events, an
adequate story for industrial age companies for which investments in
long-term capabilities and customer relationships were not critical for
success. These financial measures are inadequate, however, for guiding
and evaluating the journey that information age companies must make
to create future value through investment in customers, suppliers, em-
ployees, processes, technology, and innovation.
The Balanced Scorecard is used to check how efficiently an organisa-

tion’s assets are being managed, products/services are produced and
S
financial health of the organisation is improved. In an organisation,
the Balanced Scorecard aims at linking different levels of strategies
together. It creates a linkage between a corporate and operations strat-
egy and related performance measures. Here, the top management’s
IM
job is to guide the organisation, make adjustments among these four
performance perspectives and set future direction. This further im-
proves the organisation’s ability to develop competencies in new areas
for sustaining competitive advantage.

M
13. According to Norton and Kaplan, ________________ is a tool

that helps an organisation to articulate its strategy.
14. Which of the following performance perspective is not used
for measuring organisational performance through Balanced
N
Scorecard?
a. Financial b. Customer
c. Learning d. Distribution
Activity
Balanced Scorecard is one of the most widely used management

tools around the world. Using the Internet, make a list of major
companies in the US, Europe and Asia that use the Balanced Score-
card.
3.8 SUMMARY
A corporate strategy refers to a set of decisions that determine an
organisation’s objectives, goals and purpose.

n o t e s
There are four types of corporate-level strategies:

1. Expansion strategies
2. Stability strategies
3. Retrenchment strategies
4. Combination strategies
Expansion means increasing the extent, the volume or the scope
of operations.
Expansion strategies are the most common and popular strategies
adopted to accelerate the pace of growth of an organisation.
Expansion strategies can be further divided into various sub-strat-
egies, which are:
Expansion through concentration
S
Expansion through integration
Expansion through diversification
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Expansion through cooperation
Expansion through internationalisation
Expansion through digitalisation
Expansion through concentration involves attaining expansion by
combining the resources in one or more area of the organisation’s
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business.
Expansion through integration is performed by combining activ-
ities or functions of the business with no change in the customer
groups.
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Expansion through diversification involves an extensive change

in the business of an organisation in terms of customer functions,
customer groups, or alternative technologies.
Expansion through cooperation refers to the mutual cooperation
between organisations belonging to the same industry to achieve
a shared objective. The cooperation strategies available to organ-
isations are:
Mergers and acquisitions
Joint Ventures (JVs)
Strategic alliance
Expansion through internationalisation refers to an expansion
strategy that helps organisations to perform their operations in-
ternationally.
Digitalisation refers to digital coding of information.

n o t e s
Stability strategies are followed by an organisation in situation

where the organisation does not venture into new markets or
launch new products.
Stability strategies are of three types, which are:
Small exploration strategy
No change strategy
Profit strategy
A small exploration strategy, also known as a pause/proceed with
the caution strategy, is a tactic employed by organisations to test
the grounds before moving ahead with a full-fledged corporate
strategy.
A no change strategy involves a strategy followed by organisations
to continue with the present position of growth.
S
A profit strategy is usually followed when a few changes in the
current strategy become necessary.
IM
Retrenchment strategy is a corporate-level strategy that aims to
reduce the size or diversity of organisational operations.
There are three types of retrenchment strategies, which are:
Turnaround strategies
Divestment strategy
M
Liquidation strategies
Turnaround strategies are defined as set of strategies that help in
managing, establishing, funding and fixing a distressed organisa-
tion.
N
Divestment strategy is another form of retrenchment strategy and

is used to downsize the scope of a business in terms of selling or
liquidating a portion of the business.
Liquidation strategies are the most unattractive and severe re-
trenchment strategies, as the strategies involve closing down an
organisation and selling its assets.
Combination strategies are a mixture of stability, expansion or re-
trenchment strategies. They are also called mixed or hybrid strat-
egies.
In order to align their day-to-day decisions with corporate strate-
gy, organisations take help of a planning system, called Balanced
Scorecard.
The Balanced Scorecard is a value-based management technique,
developed by David P. Norton and Robert Kaplan in the late 1980s.
The purpose of the Balanced Scorecard is to translate strategies
into measures that uniquely communicate the corporate-level vi-
sion to the organisation.

n o t e s
key words
Acquisition: A corporate action in which an organisation buys

all or most of the target organisation’s ownership stakes in or-
der to avail control on the target organisation
Alliance: An agreement between two or more parties to protect
and fulfil their common interest
Concentration: A strategic approach in which a business focus-
es on a single market or product
Diversification: A form of corporate strategy which aims to in-
crease profitability by adding new products and new markets to
the existing business
Horizontal integration: An expansion strategy where an or-
S
ganisation merges with or acquires other organisation with
same customers and products by adopting the same marketing
strategies
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Joint venture: A cooperative business agreement between two
organisations to fulfil their mutual needs
Merger: A corporate action where two companies agree to go
forward as a single new entity instead of operating separately.
Pause /proceed with caution strategy: A kind of caution strat-
egy which is employed by an organisation that wishes to pause
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for some time to test the ground before moving ahead

Portfolio analysis: An analysis of elements of any organisa-
tion’s product mix for determining the optimum allocation of
resources
N
Vertical integration: An expansion strategy where an organi-

sation emphasises to add process to the business, which follows
the core business along the production chain

1. Explain the concept of corporate-level strategies. Why these
strategies are called grand strategies or master strategies?
2. Discuss the significance of expansion strategies in accelerating
the pace of growth of an organisation.
3. Write a short note on expansion through diversification strategies.
4. What do you understand by stability strategies? What are its
different types?
5. Explain the concept of turnaround and divestment strategies.
6. Discuss the major purpose of Balanced Scorecard.

n o t e s

Defining Corporate-level Strat- 1. Long
egies
Expansion Strategies 2. True
3. Merger
4. a. Pro-competitive alliance
5. Multi-domestic
6. Market penetration
Stability Strategies 7. c. Stability
S
8. Small exploration
Retrenchment Strategies 9. Retrenchment
10. False
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11. d. Liquidation
Combination Strategies 12. Sequential
Balanced Scorecard 13. Balanced Scorecard
14. d. Distribution

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1. A corporate strategy refers to a set of decisions that determine

an organisation’s objectives, goals, and purpose. Refer to Section
3.2 Defining Corporate-Level Strategies.
N
2. Expansion strategies are the most common and popular strategies

adopted to accelerate the pace of growth of an organisation.
It widens the scope of the organisation to expand customer
groups, customer functions, and alternative technologies. Refer
to Section 3.3 Expansion Strategies.
3. Expansion through diversification involves an extensive change
in the business of an organisation in terms of customer functions,
customer groups, or alternative technologies. Refer to Section
3.3 Expansion Strategies.
4. Stability strategies are followed by an organisation in situation
where the organisation does not venture into new markets or
launch new products. Stability strategies are of three types,
which are: small exploration strategy, no change strategy and
profit strategy. Refer to Section 3.4 Stability Strategies.
5. Turnaround strategies are defined as set of strategies that
help in managing, establishing, funding and fixing a distressed
organisation. Divestment strategy is another form of retrenchment

n o t e s
strategy and is used to downsize the scope of a business in terms

of selling or liquidating a portion of the business. Refer to Section
3.5 Retrenchment Strategies.
6. The purpose of the Balanced Scorecard is to translate strategies
into measures that uniquely communicate the corporate-
level vision to the organisation. Refer to Section 3.7 Balanced
Scorecard.
SUGGESTED READINGS
S
IM
Kale,
E-REFERENCES
Advantages and Disadvantages of Retrenchment Strategy - Wise-
Step. (2017). WiseStep. Retrieved 5 June 2017, from https://content.
M
wisestep.com/advantages-disadvantages-retrenchment-strategy/
Business Expansion: Expansion Strategies. (2017). Cf-sn.ca. Re-
trieved 5 June 2017, from http://www.cf-sn.ca/business/business_
expansion/expansion.php
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BSC-Basics/About-the-Balanced-Scorecard
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C h a
4 p t e r
FORMULATING BUSINESS-LEVEL STRATEGY
CONTENTS
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4.1 Introduction
4.2 Business-level Strategies
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4.2.1 Porter’s Competitive Strategies
4.2.2 Cooperative Strategies
Activity
4.3 Business-level Strategies and Industry Life Cycle
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Activity
4.4 Competitive Advantage
4.4.1 Competitive Advantage Factors
4.4.2 How to Build Competitive Advantage
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Activity
4.5 Acquiring Core Competency
Activity
4.6 Strategic Choice and Strategic Alternatives
Activity
4.7 Summary

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FEDEX CORPORATION – CAPABILITIES AND

COMPETENCIES
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Source: http://about.van.fedex.com
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Frederick Smith established the Federal Express Corporation in
1971, in Little Rock, Arkansas. In 1973, Federal Express moved
its operations from Arkansas to Tennessee (Memphis). After com-
pleting its first night of continuous operation, the organisation
had delivered 189 packages across 25 US cities. This was possible
with the help of 389 employees and 14 aircraft. This was how the
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express delivery services industry came into existence. In 1975,

the organisation started its first Federal Express Drop Box.
In 1975, Federal Express filed a petition to seek legal permission

for no geographic restrictions and usage of larger aircraft. After
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two years, the Congress eventually passed the Public Law 95-163.
This law permitted all cargo airlines to use larger aircrafts without
any geographic restrictions on their routes. In 1978, the organisa-
tion was listed on the New York Stock Exchange, with the FDX
symbol. In 1981, Federal Express started its delivery services to
Canada and opened its ‘SuperHub’ at the International Airport of
Memphis. In 1983, Federal Express became the first U.S. organi-
sation to earn annual revenue of $1 billion, without going through
any merger or acquisition.
In January 1998, the FedEx Corporation was established when

Federal Express acquired Caliber Incorporation. Before that, it
was known as the FDX (Federal Express) Corporation. With the
help of this and other acquisitions, FedEx strengthened its re-
nowned express delivery service. It became a more diversified
company, having a portfolio of dissimilar yet interrelated busi-
nesses.
Today, FedEx Corporation strategically manages routes of all

functional companies competing together under the FedEx name

FORMULATING BUSINESS-LEVEL STRATEGY 119
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worldwide. These functional companies are the FedEx Supply

Chain Solutions, FedEx Express, FedEx Freight, FedEx Custom
Critical, FedEx Office, FedEx Ground, FedEx Trade Networks
and FedEx Services.
Caliber Incorporation consisted of different companies engaged

in various services. These were as follows:
Roberts Express was engaged in providing exclusive and ad-
vanced shipping services
Caribbean Transport Services provides airfreight services
between locations: Puerto Rico, US, the Dominican Republic
and the Caribbean Islands
Viking Freight, a freight carrier named Less Than Truckload
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(LTL) freight carrier service serves the region of Western U.S.
and is regional
Caliber Logistics and Caliber Technology provides the inte-
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grated solutions for logistics and technology
Apart from this, the names of other companies were also changed
– RPS became FedEx Ground, Federal Express became FedEx
Express, Robert Express became FedEx Custom Critical, and
Caliber Logistics and Caliber Technology merged to form FedEx
Global Logistics. FedEx Corporation also formulated FedEx Cor-
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porate Services, a new subsidiary, in June 2000 to consolidate

functions such as marketing, sales and customer service and in-
formation technology support for FedEx Ground and FedEx Ex-
press.
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Source: http://archive.commercialappeal.com
FedEx possesses strong competencies. These include a resilient

infrastructure, high brand equity and an aggressive commitment
to innovation and technology. As a result, FedEx has become the
market leader in express delivery. In addition, these competen-
cies help the organisation to maintain a competitive advantage in

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the shipping industry as well. FedEx is known worldwide for its

quick and timely delivery of packages. The organisation boasts
of a very solid infrastructure. In 2003, FedEx spent around US
$1.5 billion on its network of airplanes, hubs and trucks all over
the world. The express delivery giant lays emphasis on innova-
tion and technological enhancements. For instance, FedEx was
the first organisation that made use of the World Wide Web and
wireless solutions in its express delivery operations. These tech-
nologies helped customers to track the status of their packages.
Apart from this, FedEx has also associated itself with the Univer-
sity of Memphis, Tennessee, to open the FedEx Technology Insti-
tute. This will help the organisation identify the latest technolo-
gies, thereby enabling it to serve its customers better.
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To conclude, FedEx strives to build its distinctive competencies
by ensuring faster delivery times. It also provides its customers
automated package tracking, which is the first of its kind. These
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competencies of FedEx are based on its resources and capabili-
ties. One of the major resources is its enormous fleet of aircraft,
which amounts to more than 650 aircrafts in total. It is the largest
operator of the Airbus A300, Airbus A310, ATR 42, Cessna 208,
McDonnell Douglas DC-10/MD-10 and the McDonnell Douglas
MD-11. This is indeed very difficult to imitate by competitors such
as the United Parcel Service (UPS), as acquiring new aircrafts
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entails massive expenditure.
In addition, there are some tangible and intangible organisation

specific resources that result in even greater distinctive compe-
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tencies. These include FedEx’s package tracking and package

handling systems and its logistics and customer support func-
tions.

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learning objectives

>> Explain the concept of business-level strategies
>> Discuss business-level strategies and industry life cycle
>> Explain the concept of competitive advantage and how to
achieve it
>> Discuss how to acquire core competency
>> Discuss how to make strategic choice through available stra-
tegic alternatives
4.1 INTRODUCTION
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In the previous chapter, you studied the concept of corporate-level
strategy and how this strategy is formulated. Once a corporate-level
strategy has been formulated, the organisation must focus on business
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competition within the industry or sector it has entered. This requires
identifying major players of the industry and deciding how to com-
pete with them. The organisations also require undertaking a detailed
research and business planning before operationalising the business.
This necessitates developing a business-level strategy, which could
be further translated into functional and operational-level strategies.
In this chapter, let us discuss how business-level strategies are
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formulated.
Unlike a corporate-level strategy, which aims at providing a common

guideline for different business units of an organisation; the busi-
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ness-level strategy tends to be more focused in nature and is made

for a single business unit, forming a part of all businesses run by the
organisation. Corporate-level strategies help an organisation in an-
swering the primary question, “In what business/businesses should
the organisation enter to maximise the long-run profitability of the or-
ganisation, and how to utilise resources to gain competitive advantage
in the market?” Business-level strategies, on the other hand, perform
as an operational plan of action for a single and independent business
unit that uses the organisation’s resources and competencies to gain
the competitive advantage over competitors. Thus, once corporate
level strategies have been formulated, an organisation needs to for-
mulate business-level strategies for each business unit in coordination
with corporate level strategies to achieve a competitive advantage in
the market.
The chapter begins by explaining the concept of business-level strat-

egy in detail. Next, it explains how business-level strategies are ad-
opted in different stages of an industry life cycle. It further discusses
how to achieve a competitive advantage by building core competency.
Lastly, the chapter explains how to make a strategic choice through
available strategic alternatives.

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4.2 BUSINESS-LEVEL STRATEGIES

Corporate-level strategies lay down the framework in which busi-
ness-level strategies operate. For example, at the corporate-level, an
organisation decides whether it wants to expand, stabilise or retrench.
This decision is applied at the business level. Thus, as the corpo-
rate-level strategies make broad-level decisions related to the overall
organisation, business-level strategies are the strategies, used by dif-
ferent individual businesses within the organisation. In other words,
business-level strategies are used by an organisation to conduct dif-
ferent business operations functions.
Business-level strategies are usually made by larger organisations

as they often have different business units with several departments
and operations. Business-level strategies work as individual strategies
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practiced by organisations for each of their business units separately.
Here, each of the business unit is termed as a Strategic Business Unit
(SBU). Every SBU has its own unique business-level strategy, which
provides guidelines to run the business unit.
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A business-level strategy focuses on three factors, which include:
Determining the target customers to be served by the SBU
Defining the type of customer need that requires being satisfied
Deciding the method for satisfying the customer need
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As discussed, in a corporate level strategy, an organisation decides

which industry to enter into; whereas, in a business-level strategy, an
organisation decides how the organisation or a business unit of the
organisation would compete in an industry. Apart from this, the main
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areas of concern for business-level strategies are as follows:

Managing and integrating the activities of the business unit with
corporate-level strategies
Building the distinctive competencies and competitive advantages
of each business unit
Identifying the markets for products or services and developing
strategies for the same with the coordination of corporate-level
strategies
Examining and evaluating strategies according to the needs of the
market
Organisations practice business-level strategies to support corpo-

rate-level strategies. Business-level strategies of an organisation
should be directed towards making the organisation financially viable
and more efficient as compared to its competitors.

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Business-level strategies are either competitive or cooperative. In a

competitive strategy, a business unit competes with other competitors
for a bigger market share. On the other hand, in a cooperative strategy
an organisation works in association with other organisation(s) in the
industry.
Let us discuss competitive and cooperative business-level strategies

in detail in the next sections.
4.2.1 PORTER’S COMPETITIVE STRATEGIES
Business-level strategies address the problem of how an organisation

could compete in a particular industry. It can be done by developing
business-level strategies in terms of generic strategies. The generic
strategies are basically competitive strategies, which can be adopted
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by any organisation to outperform the competitors in an industry, and
capture a larger market share. Competitors here refer to those organ-
isations in an industry, which offer similar products or services.
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Generic strategies are called generic because their applicability in all
organisations, regardless of their type or size. A generic strategy is a
basic way of positioning an organisation within the industry. It allows
an organisation to position itself within the industry by focusing on its
core business-level strategies.
Harvard University professor Michael Porter proposed two gener-

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ic competitive dimensions as a key to business-level strategies for

achieving a competitive advantage. The dimensions include:
Lower cost: Organisations, working on this dimension designs,
produce and distribute a product or service in a more efficient
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manner and at a cost lower than its competitors distribute.

Differentiation: This dimension helps an organisation to provide
unique and better quality products/services, which have more fea-
tures than products/services offered by competitors. Aftersales
services are also prompt and regular. These features of products/
services thus provide more value to customers, than the competi-
tors’ products.
Apart from these dimensions of a competitive advantage, an organisa-

tion requires focusing on its scope of operations. The scope of opera-
tions explains whether the organisation wants to target customers in
general or attract a particular customer segment. Based on the deci-
sion, an organisation can target either a broad or a narrow segment of
the market. When two generic competitive dimensions are combined
with two types of the target market; they result in four types of generic
strategies as shown in Figure 4.1:

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Competitive Advantage
Lower Cost Differentiation
Broad
Cost Leadership Differentiation
Target
Competitive
Scope Narrow
Cost Focus Focused Differentiation
Target
Figure 4.1: Porter’s Generic Strategies
Let us now discuss these four generic strategies in detail:
COST LEADERSHIP
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Cost leadership is the generic competitive strategy under which an or-
ganisation delivers its products or services at a cost lower than its com-
petitors, and targets a broad market segment. To become a cost leader,
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the organisation needs to have an efficient production system and a
greater control over overhead costs. Therefore, a continuous effort is
required to minimise the cost of production and distribution. Further,
the organisation needs to minimise costs in areas such as advertising,
promotion, sales force and Research and Development (R&D). A cost
leader in the industry can charge customers a lower price for its prod-
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ucts than its competitors’ charge, and still make a significant amount
of profit. Some organisations, which have successfully adopted the
cost leadership strategy, are Dell, Walmart and Southwest Airlines.
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DIFFERENTIATION
Differentiation is a generic competitive strategy under which an or-

ganisation provides unique products or services to its customers. The
uniqueness of a product or service can be achieved by providing more
features, creating a brand image stronger than the competitors, better
service and more value for money. A differentiation strategy helps in
building customer loyalty, which, in turn, increases the sales of the
product or the service. An organisation may charge a premium price
from its customers for offering unique products or services. Nike,
BMW and Apple have successfully adopted the differentiation strate-
gy. Following are some widely used differentiating factors of products
or services:
Product warranties (example: Sears tools)
Strong brand image (example: Nike)
Technological innovation (example: Apple, Sony)

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Value (example: The Walt Disney Company)

Service (example: Makita Power Tools)
Apart from cost leadership and differentiation strategies, which em-

phasises on wider market segments, there are two other types of focus
strategies. The focus strategy is also called the niche strategy, which
concentrates on a narrow segment and within that segment aims at
achieving either a cost advantage or differentiation. Such strategy is
often followed by smaller organisations in terms of either a cost focus
or a differentiation focus strategy. Let us now discuss them.
COST FOCUS
Organisations with cost focus aim at being the lowest cost producer in
the niche segment. In other words, cost focus is the strategy in which
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an organisation focuses on a small segment of the market. The cost
focus strategy helps the organisation in achieving cost advantage in
a small market segment. This strategy is mostly adopted by start-up
organisations, which can afford neither a wide scope cost leadership,
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nor a wide scope differentiation strategy.
FOCUSed DIFFERENTIATION
The differentiation focus strategy signifies the generic competitive

strategy in which an organisation offering unique products or services
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focuses on a small segment of the market. For example, DS Group ad-

opted this strategy when the organisation launched Catch, a bottled
natural spring water brand. The organisation positioned catch as a
zero calorie flavoured soda water, and targeted the high-end market.
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For gaining a competitive advantage, Porter argues that an organisa-

tion must adopt any of the four competitive strategies. Otherwise, it
would be stuck in the middle, and perform below average in a highly
competitive industry. K-Mart is an example of how an organisation
gets stuck in the middle. K-Mart invested huge amounts of money for
adopting both the Walmart’s cost leadership strategy and the Target’s
differentiation strategy.
Here, you must understand that no generic competitive strategy can

guarantee long-term success to an organisation. Many organisations
that adopted Porter’s generic competitive strategies could not attain
a sustainable competitive advantage. Organisations face several chal-
lenges in adopting these strategies, which are as follows:
Sustaining a cost leadership position: It becomes difficult to
maintain a cost leadership position for long time in the market
as competitors can easily imitate the low cost model. Change in
technology may also make the low cost model of an organisation
ineffective. Therefore, organisations face serious challenges in re-
taining the cost leadership position.

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Sustaining differentiation: It is another challenge to organisa-

tions in adopting Porter’s competitive strategies. Competitors can
imitate the unique features of products or services. Therefore, it is
also difficult to sustain product differentiation.
4.2.2 COOPERATIVE STRATEGIES
We have discussed that competitive strategies are adopted for attain-

ing a competitive advantage by combating other organisations in an
industry. However, an organisation can also work in alliance with oth-
er organisations to obtain a competitive advantage. In cooperative
strategies, an organisation forms partnerships and alliances with oth-
er organisations in the industry. Cooperative strategies can be cate-
gorised into the following two types namely the strategy of collusion
and strategic alliance. Let us discuss these two types of cooperative
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strategies in detail.
STRATEGY OF COLLUSION
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The strategy of collusion is a type of cooperative strategy in which
different organisations in an industry cooperate to raise the prices
of products or services by deliberately reducing the output. Prices of
commodities rise with a reduction in the output due to the interaction
between forces of demand and supply. Collusion may be an explicit or
an implicit one. In explicit collusion, organisations directly commu-
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nicate with one another and negotiate. Most countries disallow this
form of collusion and have declared it illegal. On the other hand, in
implicit collusion, there is no direct communication between organi-
sations. According to Barney, an implicit or tacit collusion can happen
successfully in the presence of the following factors in the industry:
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Small number of competitors

Similar cost structure of different organisations
Cooperative industry culture
High entry barriers
Large inventories and order backlogs
Single price leader in the industry
Generic Electric (GE) is a classic example of implicit collusion. The

organisation advertised in different forms of media, claiming that it
would not increase the price of its steam turbine. GE even claimed
that if it reduces the price of its steam turbine in the future, it would
refund previous customers an amount equal to the price reduction.
Westinghouse, GE’s major competitor in the steam turbine industry
received the message well and did not reduce the price of turbines. As
a result, the price of the steam turbines remained unchanged for the
next 10 years.

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STRATEGIC ALLIANCE
Strategic alliance is another type of a cooperative strategy in which

two or more organisations or business units in an industry engage
in a long-term partnership to carry out their business activities. This
is done for gaining mutual benefit. Nowadays, a strategic alliance is
more common than the strategy of collision. IBM’s agreement with
Wipro for serving customers in India and the Asia Pacific region is
an example of a strategic alliance. The basic objectives of a strategic
alliance are as follows:
Obtaining new capabilities
Securing market access
Combating various risks, such as financial risks and political risks
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1. Organisations practice business-level strategies to support

the _________-level strategies.
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2. In a cooperative strategy, a business unit competes with other
competitors for a bigger market share. (True/False)
3. ___________ is the generic competitive strategy under which
an organisation provides unique products or services to its
customers and targets a broad market segment.
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a. Cost leadership
b. Differentiation
c. Cost focus
d. Focused differentiation
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4. The cost focus strategy helps an organisation in achieving cost

advantage in a small market segment. (True/False)
5. __________ is a type of cooperative strategy in which different
organisations in an industry cooperate to raise the prices of
the products or services by deliberately reducing the output.
Activity
Using the Internet, identify and list at least five organisations that
adopted focus strategies either on the basis of low cost or differen-
tiation.
BUSINESS-LEVEL STRATEGIES AND

4.3
INDUSTRY LIFE CYCLE
The industry life cycle theory suggests that every industry passes
through different stages in its entire life cycle. There are four stages in

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the life cycle of an industry: embryonic stage, growth stage, maturity

stage and decline stage. Figure 4.2 shows four stages of the industry
life cycle:
Market Size
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Embryonic Growth Maturity Decline
Time Size
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Figure 4.2: Stages of Industry Life Cycle
Business-level strategies adopted in these stages are as follows:

Embryonic stage: Embryonic stage is the starting stage or take-off
stage of an industry’s life cycle. For example, the industry of man-
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ufacturing solar devices is in the embryonic stage. An industry is

considered to be in an embryonic stage if it:
gives low returns but its need for investment and capital are
high
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uses a technology that is not standardised

fails to provide enough information to customers; therefore,
unable to establish demand
suffers from high business risk
In the embryonic stage, business-level strategies aim at developing
competency and building market share. The possibility of gaining
the market share is easy for the first movers. However, if an organi-
sation fails to attract capital and acquire customers, it is better that
it should exit the industry in the embryonic stage itself.
Growth stage: It refers to the stage in which an industry strives
to expand. The growth stage involves technological developments,
product developments and high demand for the product. For ex-
ample, the retail industry is in its growth stage. An industry is said
to be in growth stage, if it:
gives practical shape to its business models
increases its market share

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establishes demand by providing product information to cus-

tomers
In the growth stage, the industry adopts low cost and differenti-
ation strategies. The experience of the industry leads to addition
in the learning curve of the associated organisations, and helps in
establishing low cost positions. This is a good stage for the entry
of late movers, as they can imitate strategies and technologies of
market leaders.
Maturity stage: It refers to the stage in which an industry becomes
fully developed. For example, in India, steel, textiles and oil and
gas industries have attained maturity. The intensity of competition
in these industries is very large. An industry is said to be in the
maturity stage, if it:
provides stable returns and decreases investments
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uses established business models
enjoys stable market share
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characterises stable and satisfactory demand
Industries in the maturity stage use cost leadership, differentia-
tion and focus strategies. The demand in the industry first increas-
es and then falls when more organisations enter the industry.
Decline stage: It refers to the stage in which the industry’s perfor-
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mance starts declining. For example, in India, mining industries

are in their decline stage. An industry is said to be in decline stage,
if organisations under the industry:
suffer from the declining market share
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provide low returns because of falling demand

lose brand identity for its products
wish to exit the industry
In the decline stage, the low cost business strategy is adopted to
gain the market share. The understanding of these stages helps
organisations to survive in the competitive business era.
6. If an industry gives low returns but its need for investment

and capital are high, it comes under which of the following
stages of the industry life cycle?
a. Embryonic stage b. Growth stage
c. Maturity stage d. Decline stage
7. The industry in the maturity stage adopts low cost and
differentiation strategies. (True/False)

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8. The _______________ stage of the industry life cycle presents a

good scope for the entry of late movers, as they can imitate the
strategies and technologies of market leaders.
Activity
Take an example from sick industries (individual industrial units

that have declined in performance or are declining). Identify where
the industrial unit lies in the industry life cycle. What could be the
business-level strategy for the unit to gain market share? Prepare
a report.
4.4 COMPETITIVE ADVANTAGE
S
Competitive advantage refers to a situation that puts an organisation
in a favourable or superior business position. In other words, compet-
itive advantage can be defined as the specific advantage possessed
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by the organisation over its competitors existing in the external envi-
ronment. It helps the organisation to increase sales or profit margins
and retain the maximum number of customers. It also helps in differ-
entiating the organisation from competitors and results in providing
value to the organisation as well as to stakeholders. The organisations
should focus on sustaining the competitive advantage to make it diffi-
cult for competitors to take the advantage of the market.
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According to Michael Porter, Competitive advantage grows out of val-

ue a firm is able to create for its buyers that exceeds the firm’s cost of
creating it. Value is what buyers are willing to pay, and superior value
stems from offering lower prices than competitors for equivalent benefits
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or providing unique benefits that more than offset a higher price. There
are two basic types of competitive advantage: cost leadership and differ-
entiation.
Thus, according to Porter, a competitive advantage can be achieved

either by providing comparable buyer value at lower cost than the
competitors or by performing activities at comparable cost but in dif-
ferentiated ways that provides buyers more value than competitors.
Thus, you can achieve a competitive advantage either by being low-
priced or by being unique. Considering this, there are two main types
of competitive advantage:
Cost advantage: It is an ability of an organisation to provide sim-
ilar benefits of products or services at a lower cost compared to
competitors in the market.
Differentiation advantage: In order to achieve a differentia-
tion-based competitive advantage, an organisation needs to offer
products or services to customers with enhanced features and
benefits than those of the competitors.

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Thus, the competitive advantage helps the organisation to provide

valued products/services to customers with increased profit margins.
According to Porter, a competitive advantage depends largely on the
industry structure and positioning of an organisation within the in-
dustry. He presented the ‘Five Forces Model’ to define the rules of
competition in any industry. The model presents a structured and sys-
tematic analysis of the market structure and competitive situation. It
suggests that in order to formulate a competitive strategy, an organi-
sation needs to analyse the industry in which it operates.
The five competitive forces that determine the intensity of competition

in an industry are the threat of new entrants, bargaining power of sup-
pliers, bargaining power of buyers, threat of substitute products and
competitive rivalry among the existing competitors. In Porter’s words,
the collective strength of these forces determines the ultimate profit po-
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tential of an industry. The Porter’s Five Forces Model has been shown
in Figure 4.3:
Entry Barriers Rivalry Determinants

• Economies of scale
• Proprietary product differences
IM • Industry growth
• Fixed (or storage) costs / value added
• Brand identity
• Intermittent overcapacity
• Switching costs
• Capital requirements New Entrants • Product differences
• Access to distribution • Brand identity
• Absolute cost advantages • Switching costs
Proprietary learning curve • Concentration and balance
Access to necessary inputs Threat of • Informational complexity
Proprietary low-cost product design New Entrants • Diversity of competitors
• Government policy • Corporate stakes
• Expected retaliation
• Exit barriers
Industry
Competitors
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Bargaining Power Bargaining Power

of Suppliers of Buyers
Suppliers Buyers
Intensity
of Rivalry Determinants of Buyer Power
Determinants of Supplier Power
• Differentiation of inputs
• Switching costs of suppliers and firms in the industry Bargaining Leverage Price Sensitivity
• Presence of substitute inputs Threat of • Buyer concentration • Price total
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• Supplier concentration Substitutes vs. firm concentration purchases

• Importance of volume to supplier • Buyer volume • Product differences
• Cost relative to total purchases in the industry • Buyer switching costs • Brand identity
• Impact of inputs on cost or differentiation relative to firm • Impact on quality
• Threat of forward integration relative to threat of
Substitutes switching costs performance
backward integration by firms in the industry
• Buyer information • Buyer profits
• Ability to backward • Decision maker's
Determinants of Substitution integrate incentives
Threat • Substitute products
• Relative price performance • Pull-through
of substitutes
• Switching costs
• Buyer propensity to substitute
Figure 4.3: Porter’s Five Forces Model

(Source: Porter, 1985, p.6)
The five forces of this model represent the main idea of the Porter’s
theory of competitive advantage. These five competitive forces shape
every industry and market. As these forces regulate the level of com-
petition, they therefore, control the profitability and attractiveness of
the industry. The objective of any organisation should be to modify
these competitive forces to improve the position of the organisation
in the industry. Based on information derived from the Porter’s Five
Forces Model, an organisation can decide its direction to achieve a
long-term advantage.

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The competitive advantage gained by an organisation needs to be

sustained in the market to cope with competitors. An organisation, in
order to achieve a sustainable competitive advantage needs to focus
on the following features:
Focus on creating a durable core competency that tends to sustain
in the market. For this, organisations should focus on continuous
R&D to come up with value-generating inventions that are unique
in nature and provide a long-term sustainable competitive edge to
the organisation.
Focus on creating competitive strategies that cannot be imitated
or copied by competitors very easily. This helps organisations to
maintain its position in the market in the long run.
Here, you should note that a competitive advantage is more likely to
S
be durable if it is built upon core capabilities that are difficult for oth-
ers to imitate. According to Barney (1991), A firm is said to have a
sustained competitive advantage when it is implementing a value cre-
ating strategy not simultaneously being implemented by any current or
IM
potential competitors and when these other firms are unable to duplicate
the benefits of this strategy.
Exhibit
Porter’s Five Forces that Shape Industry Competition

M
Threat of new entrants: It refers to the ease with which poten-

tially new entrants can enter an industry. The degree of threat
of new entrants in an industry depends on the entry barrier of
the industry. The lower the entry barrier, the higher is the threat
of new entrants, and vice versa. A low entry barrier attracts new
N
players to enter an industry, which, in turn, puts pressure on

the price level. Therefore, a low entry barrier limits the profit
potential of an industry. Take example of the beverage industry
in India, where entry barriers are relatively low. This encourag-
es new brands to appear in the market with similar prices than
the dominant market players like Coke and Pepsi.
Bargaining power of suppliers: It refers to the ability of suppli-
ers to manipulate the price of products supplied to an organi-
sation. If suppliers have a high bargaining power, the profit po-
tential of the industry would be relatively low. Suppliers enjoy
a high bargaining power if there are a few suppliers catering to
a large number of organisations in the industry. In addition, if
a product or service is unique in nature, and there is no other
substitute of the product; even then the suppliers have an upper
hand. If we take the example of Coke or Pepsi, the main ingre-
dients for soft drink include carbonated water, phosphoric acid,
sweetener and caffeine. Here suppliers are neither concentrat-
ed nor differentiated. Thus, Coke or Pepsi appear to be the big-
gest customers of any of these suppliers.

n o t e s
Bargaining power of the buyers: It affects the profitability of

an industry substantially. The bargaining power of buyers re-
fers to the ability of buyers to bring down the price of prod-
ucts and services offered by an organisation. If the bargaining
power of buyers is high, the profitability of the industry is ad-
versely affected. Buyers enjoy a high bargaining power if they
purchase a significantly large portion of the product or service
of the organisation. In addition, the bargaining power of buy-
ers is high if a similar product is available with other organi-
sations. For example, individual buyers may have no pressure
on Coke or Pepsi. However, large retailers, such as Walmart
and Food Bazaar may have considerable bargaining power be-
cause of the large order quantity they place to Coke and Pepsi.
Threat of substitute products: This force plays a vital role in
S
determining the profitability of an industry. Substitute products
refer to products that satisfy the same need of customers as oth-
er products. For example, laptop is a substitute of the Personal
Computer (PC). The availability of substitutes limits the prof-
IM
it potential of an industry as the organisation cannot charge a
higher price for its product. For example, if the prices of Pepsi
increase, consumers would easily switch to Coke.
Competitive rivalry among existing competitors: It refers to
the intensity of competition among different organisations in
an industry. According to Porter, the intensity of competition
M
within an industry depends on a number of factors. These fac-

tors are the number of competitors, growth rate of the industry,
nature of the product or service, product diversity and exit bar-
riers. Higher the intensity of competition; lower is the profit-
N
ability of an industry. Currently, Coke and Pepsi are the biggest

opponents in the market with a range of predominant carbon-
ated beverages.
4.4.1 COMPETITIVE ADVANTAGE FACTORS
A competitive advantage helps to distinguish organisations from its

competitors. In order to be successful, organisations should have a
clear competitive advantage, which can be gained based on various
factors, some of which are explained as follows:
Delivering consistent quality products/services: Delivering qual-
ity products/services consistently gives a competitive edge to or-
ganisations. It requires an understanding of customers’ expecta-
tions regarding the product/service quality level. This can help
organisations consistently meet and exceed the expectations of
customers and gain a competitive advantage in the market.
Managing promises: It is one of the important steps in achieving a
competitive edge. In order to successfully meet the expectations of
customers, organisations should promise only what they are confi-

n o t e s
dent of delivering rather than making promises which are difficult

for them to fulfil. For example, if a retailer promises to provide
home delivery within 24 hours, but fails to do so, the retailer will
lose the customer. Therefore, organisations should make an hon-
est representation of their capacity to deliver the product/service
through explicit means, such as personal selling and advertising
and implicit means such as price of the product/service and ap-
pearance of the facilities.
Maintaining reliability: Customers give extensive importance to
the reliability factor associated with an organisation. Organisa-
tions that fail to deliver reliable products/services, fail in gaining
the trust of its customers. On the other hand, an organisation that
emphasises and designs its operations in a way that could gain the
reliability of customers may achieve a competitive advantage.
S
Focusing on target customers: An organisation in order to achieve
a competitive advantage requires focusing on its target customers
who buy its products/ services. This will help in developing a more
focused operations strategy for the target customers, and thereby
IM
keeping them happier and more satisfied.
Analysing competition: Organisations need to understand market
competition. This is necessary because, in order to gain an advan-
tage, organisations first require knowing where their competitors
stand, and what their strengths and weaknesses are.
M
Once an organisation is clear on these factors to gain a competitive ad-

vantage, it may decide on a relevant strategy that can help in not only
benefitting the business, but also in creating an edge over its compet-
itors.
N
Exhibit
Emirates: Maintaining a Competitive Advantage
Source: www.khaleejtimes.com
Established in 1985 as a part of the Emirates Group, Emirates is the

largest airline in the Middle East, operating over 3,600 flights per
week from its hub at Dubai International Airport, to more than 140
cities in 81 countries across the world. The airline is also known for
operating longest flights in the world.

n o t e s
The airline competes successfully in the industry based on compet-

itive pricing strategies that it uses against its competitors, such as
Air France-KLM, Lufthansa, British Airways, Air Canada, Qantas
and Air New Zealand. The company offers world-class flight oper-
ation with cheaper long haul flights that are extremely profitable.
All this has allowed the airline to experience the largest growth in
the Asian airlines market.
S
Source: The Telegraph; www.elfagr.org
Emirates works on an advanced competitive business model that

IM
defines its corporate strategy in the market and ensures a compet-
itive advantage against its competitors. Let us discuss major fea-
tures of its competitive business model that help the airline to gain
a competitive edge:
In order to deal with unstable jet fuel prices, Emirates has en-
tered into a deal with several major oil companies to ensure a
M
supply of jet fuel at a specific fixed price. It not only helps Emir-
ates maintain profitability in a dynamic oil market, but also
gives it a clear advantage over its competitors.
Emirates made a huge investment in long haul flight services,
N
enabling it to provide services at cheaper rates than its compet-

itors. Long haul flights save a lot of revenue for Emirates, ensur-
ing that the airline does not increase its air fares. This clearly
gives it a competitive edge over other airlines that operate short
haul flights.
Emirates has not only diversified its investment portfolio into
areas, such as airport services, but also focuses on diversifying
infrastructure development within its operational routes. To
provide flight and airport service with a difference, Emirates
has started its own cab services at various airports to enable
passengers reach their final destinations safely.
Emirates ensures advanced security and airport surveillance to
create a good image of the organisation and to become the pre-
ferred air carrier for travellers.
The airline ensures that its staff receives regular training to de-
liver exceptional service to their passengers. Training of staff is
part of the airline’s corporate strategy, which clearly helps the
airlines gain a competitive advantage.

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4.4.2 HOW TO BUILD COMPETITIVE ADVANTAGE
A competitive advantage is built through the strategic management of

resources, capabilities and core competencies. It also depends on how
well an organisation responds to opportunities and threats in the ex-
ternal environment, utilises strengths and overcomes weaknesses. In
order to build a competitive advantage, an organisation should follow
certain steps, explained as follows:
1. Define the purpose of your business: The first step to achieve a
competitive advantage is to define the purpose of the business.
The purpose of the business is often reflected through vision,
mission, goals and objectives. This step also focuses on defining
the values that the business aims to create for customers. Here,
it is important to identify the target customers and their need/
problem, and how your product/service will satisfy/solve them.
S
2. Examine internal and external environmental factors:
It is important for an organisation to identify and analyse
various internal and external environmental factors. Internal
IM
factors help the organisation in identifying their strengths and
weaknesses and external factors help in recognising the threats
and opportunities present in the market.
3. Identify your skills and competencies: At this step, businesses
are required to identify their core competencies that could help
them in gaining a competitive advantage. Identifying skills and
M
competencies are important as they provide an organisation

access to a wide variety of markets, value to the selling product/
service and differentiating attributes to the organisation’s
operations to make it difficult for competitors to imitate. The
core competency of an organisation could be anything. Let’s
N
take examples of world’s leading companies. Apple is one of

the most valued companies in the world. Its core competency
is ‘unique design’. Outstanding designs of products give Apple
the ability to enter various markets with huge success. Google
is another company with core competency in ‘understanding
and development of algorithms’. Their ability to create great
algorithms gave them a unique position in almost every market
of the world, where they operate. Netflix is another example with
core competency in ‘content delivery’. The company specialises
in and provides streaming media and video-on-demand online
and DVD by mail. Thus, it is important to identify your strength
and develop it as your core competency. You will study the
concept of core competency in detail in the next section.
4. Define the size and market standing of your business: An
organisation, in order to avoid becoming a marginal player in the
marketplace, must define the scale of operations, sales volume
and revenue required to maintain profitability. The organisation
also requires identifying the number of facilities, equipment and
human resource for producing the needed volume.

n o t e s
5. Define a strategic approach to competitive advantage: This

step aims at defining strategies that may help the organisation in
achieving a competitive advantage. For example, an organisation
in order to achieve a differentiation advantage may select a
focused differentiation strategy in broad markets.
6. Implement strategies to achieve a competitive advantage:
As the organisation is now clear about its core competencies
and the target market, it could focus on developing and
implementing strategies to position itself in the market. A proper
implementation of strategies could lead the organisation to build
a competitive advantage in the market.
Here, you should note that there is no fixed design to build a com-
petitive advantage. Different organisations, even if they belong to the
same industry, follow their own approach to position themselves in the
S
market. However, the aforementioned steps are some general guide-
lines that may help an organisation to build competitive advantage in
a basic manner.
IM
9. ______________ is an ability of an organisation to provide

similar benefits of products or services at a lower cost
compared to the competitors in the market to increase profit
margins.
M

10. The _____________ model determines the intensity of
competition in an industry.
Activity
N
Take an example of an organisation that is market leader in its in-

dustry, for example, Hindustan Unilever Ltd. (HUL). Using the In-
ternet, identify the source of competitive advantage for your chosen
organisation. Prepare a short note on it.
4.5 ACQUIRING CORE COMPETENCY

A core competency refers to a collective learning of an organisation
that is gained by coordinating diverse skills of employees and inte-
grating technologies. According to Prahalad and Hamel, a core com-
petency should fulfil three criteria, which are as follows:
Provide benefits to consumers
Make it difficult for competitors to imitate
Make significant contribution to a wide variety of markets
A core competency is critical for the organisation to achieve a compet-

itive advantage. For instance, Tesco.com has been successful in cap-

n o t e s
turing leadership in online grocery shopping by designing and deliv-

ering a customer interface system that personalises online shopping.
Core competency can be gained by an organisation in either of the two

ways – explicit knowledge or tacit knowledge. Explicit knowledge is
something that can be easily transmitted or communicated to others.
The tacit knowledge either exists in employees’ experience or is inher-
ited in the culture of the organisation. Thus, it cannot be transmitted
easily to others. It is the tacit knowledge that helps an organisation
to sustain a competitive advantage in the market, as it is difficult to
imitate by competitors.
Similar to the core competency, organisations possess distinctive com-

petencies. A distinctive competency is a specific ability possessed by
a particular organisation exclusively or relatively in large measure. It
S
is a strength that allows an organisation to gain a competitive advan-
tage by differentiating its products or minimising costs. For instance,
Motorola created a distinctive competency by developing Six Sigma
methodologies in its manufacturing process to produce defect-free
IM
cell phones. Table 4.1 shows the difference between a core competen-
cy and a distinctive competency.
TABLE 4.1: DIFFERENCE BETWEEN CORE COMPETENCY

AND DISTINCTIVE COMPETENCY
Core Competency Distinctive Competency
M
It is a well-performed internal It is a unique competitive activity

activity, which is central to the that helps an organisation to per-
organisation’s competitiveness and form better than its rivals.
profitability.
N
Examples: Examples:
Sony: Core competency in miniatur- Sharp Corporation: Expertise in
isation of products flat panel display technology
McDonald’s: Core competency in Intel: Expertise in designing and
delivery speed, customer care and manufacturing powerful micropro-
cleanliness cessors for PCs
Federal Express: Core competency Walmart: Expertise in low cost dis-
in logistics management and cus- tribution and use of state-of-the-art
tomer service retail technology
According to Robert M. Grant, competitors find it difficult to replicate

core competency that has the following features:
Durability: This reflects the time span that a resource takes to
become obsolete or depreciate. The longer is the durability of any
product/service/brand name, the tougher is for competitors to rep-
licate the core competency.
Transparency: It reflects the degree of transparency between re-
sources, capabilities and strategies used to develop a core compe-

n o t e s
tency. The more confused competitors are about what is building

core competency, the more difficult it is to copy it. Hence, in order
to create core competency, the level of transparency should be low.
Transferability: The lower the level of transferability of factors
that build core competency for an organisation, the harder it would
be for competitors to replicate the core competency. Here, trans-
ferability reflects the relocating ability of any resource, capabili-
ty and strategy that build a core competency for an organisation.
If these factors can be easily transferred, then competitors could
easily follow it. Therefore, for building a core-competency for an
organisation, the level of transferability must be low.
Replicability: It covers the usage of duplicate resources or capa-
bilities by the competitors to imitate other’s core competency. An
organisation should try to build its core competency on factors
S
that have fewer chances for being copied.
Identifying factors that help in building a core competency further

assist an organisation in determining a sustainable competitive ad-
IM
vantage. Building a core competency that is difficult to replicate gives
a fair chance to an organisation to remain ahead of competition and
enjoy the benefits of a competitive advantage in the market.

M
11. The ___________ knowledge either exists in employees’

experience or is inherited in the culture of the organisation.
12. In order to create core competency, the level of transparency
should be high. (True/False)
N
Activity
Take three service organisations and three manufacturing organi-

sations of your choice. List their core competency in a chart.
STRATEGIC CHOICE AND STRATEGIC

4.6
ALTERNATIVES
The strategy of an organisation is related to various decisions, such
as how, when and where to compete in the market. A strategic choice
refers to the process of selecting the best strategic alternatives from
available strategies. For example, an organisation has to decide wheth-
er to position its products in a niche market with high price and high
differentiation or in the mass market with low price and low differen-
tiation.
Making an accurate strategic choice is not an easy decision for an or-

ganisation, as it has to select from various alternatives to achieve ob-

n o t e s
jectives in the best possible manner. For instance, an organisation may

decide to focus on the Indian market only; however, this choice would
preclude the goal of becoming a global organisation. This shows that
choices may require giving up one aspect to gain the other.
Thus, a strategic choice is a decision-making process, wherein the

top management or decision makers accept or reject a strategic alter-
native based on a certain criteria. These criteria can be cost, human
resource and technological considerations. A strategic choice can be
made by the following steps as shown in Figure 4.4:
Identifying the strategic alternatives
S
IM Analysing the strategic alternatives
Evaluating the strategic alternatives
Selecting the best strategic alternative

M
Figure 4.4: Steps in the Process of Strategic Choice
Let us discuss the steps involved in the strategic choice process in

detail:
N
1. Identifying strategic alternatives: The first step in the strategic

choice process is to categorise various strategic alternatives
available to an organisation. The step aims at focusing on a few
strategic alternatives to narrow down the choices to a manageable
number of feasible strategies. In other words, this step limits
the strategic choice to a few alternatives. An organisation may
face difficulty in identifying all the alternatives with equal
transparency at the same time. It may make the process unwieldy
and unproductive. However, if only a few strategic alternatives
are considered, the decision-maker could effectively focus on
those alternatives. Thus, strategic choice makers prefer to limit
the choice to a few strategic alternatives. However, this may lead
to the ignorance of some valuable alternatives.
An organisation tries to focus on specific strategic alternatives
with the help of a technique called gap analysis. Gap analysis
involves visualising the future goals of an organisation and
working towards it by finding ways to meet goals. Gap analysis
helps organisations to know where they currently stand and

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how they can achieve the desired performance. A pictorial

representation of gap analysis is shown in Figure 4.5:
Desired
Performance
Performance Gap
Present
Performance
Performance
T1 T2
Time
S
Figure 4.5: Gap Analysis
The gap size (narrow or wide) determines the strategic choice
from available alternatives. Strategic alternatives available to
IM
an organisation at the corporate level are expansion, stability,
retrenchment and combination. A narrow gap implies that
an organisation is not too far from its goal, thus the feasible
alternative in this case can be stability strategies. If the gap is
wide due to potential environmental opportunities, expansion
strategies could be followed. However, if the gap is wide due to
poor performance in the past, retrenchment strategies can be
M
implemented. In a complex scenario, where multiple reasons are

responsible for the gap, combination strategies can be used.
2. Analysing strategic alternatives: This step focuses on examining
available strategic alternatives. All strategic alternatives are
N
studied thoroughly to discover their strengths, weaknesses,

opportunities and threats. An organisation has to analyse
various selection factors to finalise a strategy. Selection factors
are further divided into objective and subjective factors. An
objective factor is based on data and facts, such as percentage
of market share or sales; whereas a subjective factor is based on
the personal judgment of a decision maker, such as perceptions
and beliefs of a decision maker. Thus, based on selection factors,
strategic alternatives selected in the first stage are analysed to
ascertain their benefits and risks.
3. Evaluating strategic alternatives: This step involves assessing
the strategic alternatives against the set criteria. An organisation,
before finalising an alternative always, checks whether it has
enough resources and capabilities to implement selected strategic
alternative. The long-term objectives of an organisation are also
taken into consideration before selecting the alternative.
4. Selecting the best strategic alternative: This step involves
choosing the best alternative that appears to be the most

n o t e s
suitable under existing conditions. This step aims at making the

strategic choice. Usually, more than one strategy is chosen for
implementation. After finalising the strategy, a blueprint should
be prepared by an organisation that details out the conditions
under which the alternative will be used.
However, an organisation should be ready for unexpected events,
which may arise later and create new opportunities or wipe out
the unforeseen threats. Therefore, an organisation should also
devise some contingency strategies that are devised in advance
to deal with the changing circumstances. A contingency strategy
acts as a proactive strategy that ensures the continuity of the
business in case of uncertain events.
Exhibit
S
Role of TOWS Matrix in Developing Strategic Alternatives
An organisation can develop strategic alternatives by matching

the external opportunities and threats with the internal strengths
IM
and weaknesses. TOWS is an acronym for Threats, Opportunities,
Weaknesses and Strengths. TOWS Matrix shows how the exter-
nal opportunities and threats can be matched with the internal
strengths and weaknesses. Thereby, the TOWS Matrix helps in de-
veloping four sets of strategic alternative strategies, shown in the
following figure:
M
Strategies
Tactics Internal Strengths Internal Weaknesses
Actions
N
S-O Strategy W-O Strategy

(combination of (combination of
External Opportunities
strengths weaknesses
and opportunities) and opportunities)
S-T Strategy W-T Strategy

(combination of (combination of
External Threats
strengths weaknesses
and threats) and threats)
Figure: Developing Strategic Alternative through the

TOWS Matrix
For developing a TOWS Matrix, an organisation needs to take the

following steps:
1. Listing its internal strengths and weaknesses in the respective
columns of the matrix
2. Enumerating its external opportunities and threats in the
respective columns of the matrix

n o t e s
3. Developing four sets of alternative strategies by combining its

various strengths, weaknesses, opportunities and threats
The four sets of strategic alternatives developed by the TOWS

Matrix are as follows:
S-O strategies: These are strategies, which mainly intend to
capture external opportunities by utilising the internal strengths
of the organisation. For example, a low cost structure is the
strength of Walmart. The organisation can, therefore, capitalise
on this strength by expanding into emerging markets such as
India and Brazil where consumers are very price sensitive.
S-T strategies: These strategies are formulated by consider-
ing the strengths of an organisation, and the external threats
faced by the organisation. S-T strategies aim to avoid or mini-
S
mise the effect of external threats by utilising the organisation’s
strengths.
W-O strategies: These strategies help in leveraging external op-
IM
portunities by overcoming the weaknesses of an organisation.
W-T strategies: These strategies help in avoiding threats by mi-
nimising the weaknesses of an organisation. The W-T strategy is
the most defensive strategy among all four strategies.
Therefore, you can say that the TOWS Matrix is an effective tool
M
for formulating a strategic alternative for any organisation or an

individual business unit.

N
13. The process of selecting the best strategic alternatives from

the available strategies is called ______________.
14. In gap analysis (conducted for strategic choice), if the
gap is wide due to potential environmental opportunities,
______________ strategies could be followed.
a. Expansion
b. Stability
c. Retrenchment
d. Combination
Activity
Using the Internet, find two examples where government policies

have significantly affected the strategic choice made by the organi-
sations. Write a short note on it.

n o t e s
4.7 SUMMARY
Business-level strategies work as individual strategies practiced
by organisations for each of their business units separately.
Business-level strategies address the problem of how an organisa-
tion could compete in a particular industry.
Business-level strategies are either competitive or cooperative. In
a competitive strategy, a business unit competes with other com-
petitors for a bigger market share.
On the other hand, in a cooperative strategy, an organisation works
in association with other organisation(s) in the industry.
Generic strategies are called generic because their applicability in
all organisations, regardless of their type or size.
S
A generic strategy is a way of positioning an organisation within
the industry.
The four types of generic strategies are:
IM
Cost leadership
Differentiation
Cost focus
Differentiation focus
M
Cost leadership is the generic competitive strategy under which an

organisation delivers its products or services at a cost lower than
its competitors, and targets a broad market segment.
Differentiation is the generic competitive strategy under which an
N
organisation provides unique products or services to its custom-

ers.
Organisations with cost focus aim at being the lowest cost produc-
er in the niche segment.
Differentiation focus strategy signifies the generic competitive
strategy in which an organisation offering unique products or ser-
vices focuses on a very small segment of the market.
In cooperative strategies, an organisation forms partnerships and
alliances with other organisations in the industry.
Cooperative strategies can be generally categorised into two types:
Strategy of collusion
Strategic alliance
The industry life cycle theory suggests that every industry passes
through different stages in its entire life cycle.
There are four stages in the life cycle of an industry: embryonic,
growth stage, maturity and decline.

n o t e s
In the embryonic stage, the industry is in the starting stage or

take-off stage of its life cycle. In the embryonic stage, business-lev-
el strategies aim at developing competency and building market
share.
Growth stage refers to the stage in which an industry strives to
expand. In the growth stage, the industry adopts low cost and dif-
ferentiation strategies.
Maturity stage refers to the stage in which an industry becomes
fully developed. The industry in the maturity stage uses cost lead-
ership, differentiation and focus strategies.
At decline stage, the industry’s performance starts declining. In
the decline stage, the low cost business strategy is adopted to gain
the market share.
S
Competitive advantage can be defined as the specific advantage
possess by the organisation over its competitors existing in the ex-
ternal environment.
The
IM
competitive advantage helps the organisation to provide the
valued product/service to the customers with increased profit mar-
gins.
There are two main types of competitive advantage:
Cost advantage
Differentiation advantage
M
Michael Porter presented the ‘Five Forces Model’ to define the

rules of competition in any industry. The model presents a struc-
tured and systematic analysis of market structure and competitive
situation.
N
The five competitive forces that determine the intensity of compe-

tition in an industry are threat of new entrants, bargaining power
of the suppliers, bargaining power of the buyers, threat of substi-
tute products and the competitive rivalry among the existing com-
petitors.
Factors that help in gaining competitive advantage are:
Delivering consistent quality products/services
Managing promises
Maintaining reliability
Focusing on target customers
Analysing competition
In order to build competitive advantage, an organisation should
follow certain steps, which are:
1. Define the purpose of your business
2. Examine the internal and external environmental factors

n o t e s
3. Identify your skills and competencies

4. Define the size and market standing of your business
5. Define strategic approach to competitive advantage
6. Implement the strategies to achieve competitive advantage
Core competency refers to collective learning of an organisation
that is gained by coordinating diverse skills of employees and inte-
grating technologies.
According to Robert M. Grant, competitors find it difficult to repli-
cate core competency that has the following features:
Durability
Low transparency
Low transferability
S
Low replicability
Strategic choice refers to the process of selecting the best strategic
IM
alternatives from the available strategies.
The steps involved in the strategic choice process are:
1. Identifying the strategic alternatives
2. Analysing the strategic alternatives
3. Evaluating the strategic alternatives
M
4. Selecting the best strategic alternative
key words
N
Blueprint: A design plan or layout of something.

Niche market: The subset of a market, which focuses on a par-
ticular product for satisfying specific market need.
Operational strategy: The strategy that deals with the day-to-
day organisational activity to implement business-level strate-
gies by focusing on resources, processes and people.
Positioning: An act of creating exclusive, reliable and familiar
customer perception about the image of an organisation and its
offerings.
Target market: A group of customers that an organisation tar-
gets to sell its offerings.

1. Explain the concept of business-level strategies.
2. Discuss the four types of generic strategies given by Michael
Porter.

n o t e s
3. What are the different stages of industry life cycle? Discuss

business-level strategies adopted at different stages of the
industry life cycle.
4. Explain the concept of competitive advantage. Discuss how a
competitive advantage can be achieved by an organisation.
5. Write a short note on core competency. How core competency
can be gained by an organisation?
6. Discuss steps involved in the strategic choice process.
S
Business-level Strategies 1. Corporate
2. False
IM
3. b. Differentiation
4. True
5. Strategy of collusion
Business-level Strategies and 6. a. Embryonic stage
Industry Life Cycle
7. False
M
8. Growth
Competitive Advantage 9. Cost advantage
10. Five Forces
Acquiring Core Competency 11. Tacit
N
12. False
Strategic Choice and Strategic 13. Strategic choice
Alternatives
14. a. Expansion

1. Business-level strategies work as individual strategies, practiced
by organisations for each of their business units separately. Refer
to Section 4.2 Business-level Strategies.
2. The four types of generic strategies are cost leadership,
differentiation, cost focus and differentiation focus. Refer to
Section 4.2 Business-level Strategies.
3. The four stages in the life cycle of an industry are embryonic
stage, growth stage, maturity stage, and decline stage. Refer to
Section 4.3 Business-level Strategies and Industry Life Cycle.
4. Competitive advantage can be defined as the specific advantage
possess by the organisation over its competitors existing in the

n o t e s
external environment. An organisation can achieve competitive

advantage either by being low-priced or by being unique. Refer
to Section 4.4 Competitive Advantage.
5. Core competency refers to collective learning of an organisation
that is gained by coordinating diverse skills of employees and
integrating technologies. Refer to Section 4.5 Acquiring Core
Competency.
6. Four steps involved in the strategic choice process are identifying
strategic alternatives, analysing strategic alternatives, evaluating
strategic alternatives and selecting the best strategic alternative.
Refer to Section 4.6 Strategic Choice and Strategic Alternatives.
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SUGGESTED READINGS
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Heizer, J. & Render, B. (2001). Operations Management (1st ed.).
Kale,S. (2013). Production and Operations Management (1st ed.).
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E-REFERENCES
Generic Strategies. (2017). Marketingteacher.com. Retrieved 8 June
2017, from http://www.marketingteacher.com/generic-strategies/
N
Porter’s Five Forces a Competitor Analysis tool - Michael Porter.

(2017). RapidBI. Retrieved 8 June 2017, from https://rapidbi.com/
porterfiveforces/
Porter’s Generic Strategies. (2017). Quickmba.com. Retrieved 8
June 2017, from http://www.quickmba.com/strategy/generic.shtml
Porter’s Generic Strategies: Choosing Your Route to Success.
(2017). Mindtools.com. Retrieved 8 June 2017, from https://www.
mindtools.com/pages/article/newSTR_82.htm
Strasenburgh, C. (2017). Using Porter’s Five Forces to gain a
competitive advantage. Blip. Retrieved 8 June 2017, from http://
www.martinoflynn.com/blog/2013/01/09/using-porters-five-forc-
es-to-gain-a-competitive-advantage/
Understanding Business-Level Strategy through “Generic Strat-
egies”. (2017).2012books.lardbucket.org. Retrieved 8 June 2017,
from https://2012books.lardbucket.org/books/strategic-man-
agement-evaluation-and-execution/s09-01-understanding-busi-
ness-level-s.html

C h a
5 p t e r
PROCESS PLANNING AND IMPROVEMENT
CONTENTS
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5.1 Introduction
5.2 Product and Process
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Activity
5.3 Types of Processes
Activity
5.4 Process Technology
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5.4.1 Automation in Manufacturing

5.4.2 Automation in Services
Activity
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5.5 Process Improvement

5.5.1 Approach to Improvement
5.5.2 Steps in Improvement
5.5.3 Strategies for Improvement
Activity
5.6 Summary

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THE CULTURE OF CONTINUOUS IMPROVEMENT IN TOYOTA
Toyota is one of the leading proponents of quality improvement

techniques. Over the decades, Toyota has successfully developed
a culture of continuous improvement in the organisation. Toyota
aims to exceed customer expectations by continuous process im-
provement and quality improvement. The culture of continuous
improvement in Toyota is a result of years of co-ordinated efforts
of employees and the support of the management.
As a result, at present, Toyota employees come up with more than

one million process improvement techniques in a year. 90% of
these process improvement ideas are implemented to improve
the quality of the working processes and practices.
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Source: www.abc.net.au
At Toyota, employees from the executive level to shop-floor work-

ers are encouraged to take initiatives and show their creativity
to improve and control quality. At the entry level, the best of the
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resources are selected with the pre-defined quality resource man-

agement system. Toyota selects the brightest and the most com-
petent workers for assembly lines and challenges them to grow
by continuously solving problems. Similarly, Toyota carefully se-
lects individuals for sales, engineering services, accounting and
human resources to constantly improve the production process
and to increase customer satisfaction level.
Toyota invests a significant amount of money in training employ-

ees and turning itself into a truly learning organisation. It makes
Toyota significantly different from other organisations. Following
are some of the most prominent features of the quality improve-
ment programs of Toyota:
Developing and nurturing a culture of continuous improve-
ment in the organisation
Directing organisational changes from top to bottom
Training employees with the principles of continuous im-
provements, building teams and solving problems

PROCESS PLANNING AND IMPROVEMENT 151
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learning objectives

>> Discuss the role of process in producing product/services
>> Describe the various types of process
>> Define process technology
>> Discuss the role of automation in manufacturing and service
organisations
>> Explain the importance of process improvement
5.1 INTRODUCTION
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In the previous chapter, you studied how business-level strategies are
formulated within an organisation and how they help (the organisa-
tion) in achieving a competitive advantage. In order to bring a strat-
egy to life, an organisation requires creating integrated processes to
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ensure that all functions and divisions are aligned with the formulated
strategy and are able to accomplish organisational goals. In this chap-
ter, let us study process planning and improvement in detail.
You must have heard the term ‘process’ many times. But do you know
what does it actually mean? A process is nothing but a systemat-
ic and planned sequence of cross-functional, value-adding activities
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performed to transform inputs into outputs in order to achieve the

pre-determined organisational goals and objectives.
The concept of a process lays emphasis on the point that every process
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of an organisation or any of its departments should be well-defined,

monitored and controlled with the right inputs. This would ultimately
help in producing high-quality output. Planning of a process requires
optimisation and integration of cross-functional activities that make
up a work style or functioning style of an organisation. This is because
Individual departments can never produce a complete product or ser-
vice without interacting with other functional departments. For exam-
ple, production of automobiles involve supply of raw materials, supply
chain, warehousing, assembly of the spare parts and distribution of
the final products. Therefore, the complete process involves integra-
tion between a numbers of departments.
In addition to planning of process for developing products and ser-

vices, an organisation requires to focus on process improvement,
which is a progressing effort to improve processes, products and ser-
vices of an organisation. Process improvement encourages involves
employees from different level of an organisation to suggest for small-
er improvement measures on a regular basis.

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This chapter starts with detailed explanation on the processes involved

in the production of a product. Next, it discusses the different types of
process. It also explains process technology in detail. In addition, the
chapter discusses the concept of process improvement and how it is
achieved through continuous and breakthrough improvements.
5.2 PRODUCT AND PROCESS

A process is a group of related tasks with specific inputs and outputs.
No product/service can be made without a process and no process can
exist without at least one product/service. In other words, a product is
the final output of a process. Let us first discuss the concept of product.
Product, here, refers to a good or service that satisfies the needs and
wants of customers. It is offered in the market by an organisation to
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earn revenue by meeting the requirements of customers. Product is
an asset of an organisation and referred to as the backbone of market-
ing mix. Therefore, it is important for an organisation to understand
the needs of customers before developing the product. For exam-
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ple, some customers use mobile phones mostly for talking purposes,
whereas some use it for talking as well as for browsing the Internet.
Some customers also use mobile phones for business purposes, such
as teleconferencing. Therefore, you can say that a product is anything
that is capable of satisfying a felt need.
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For a manufacturer, a product is a result of various processes or op-

erations. It is the manufacturer who determines the processes and
operations which are deployed to create the product. Process deci-
sions are often strategic in nature and no organisation can achieve a
competitive advantage with a faulty process. A process explains what
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tasks need to be done and how they should be coordinated with other
functions, people and organisations.
Processes are developed to create value for customers, shareholders

or society as a whole. They depict an organisation’s overall approach
to physically produce products and services. Thus, processes work as
a strategy and reflect how the organisation has chosen to compete in
the marketplace, support product decisions and facilitate the achieve-
ment of corporate goals and objectives. An organisation requires de-
veloping a process strategy for:
Vertical integration: It refers to the extent to which an organisa-
tion aims to produce inputs and control the output of each stage of
the production process.
Capital intensity: It refers to the amount of capital and labour re-
sources that are required to be used in the production process.
Process flexibility: It denotes the ease to which resources are
adjusted against the changes in the market demand, technology,
product/service and resource availability.

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Customer involvement: It defines the role of customers in the pro-

duction process.
While developing a product, an organisation evaluates processes in

the laboratory as well as in the open market. The results of these test-
ing processes reveal the fittest design of the product.
Let us discuss processes involved in the production of a product:

Need identification process: Identifying the need of a product en-
ables an organisation ensure that the new product fulfils consum-
er needs that the existing product cannot fulfil.
Product planning process: This involves developing a conceptual
design of the product. Concept design is finalised by the produc-
tion and operation personnel. Their joint effort would also help
design and test the new production process early in the develop-
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ment process.
Product design process: This provides detailed knowledge by the
use of intense research conducted to determine the technical fea-
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sibility of the product. Then, there are certain parameters that are
used to define the fittest design. This is one test which all the avail-
able alternative designs have to pass through.
Engineering design process: This involves performing engineer-
ing activities to develop a detailed definition of the product, includ-
ing its subsystems and components, materials, sizes, etc. These
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engineering activities include analysis, experimentation and data

collection to find out the design that meets design objectives, such
as functions, reliability and safety.
Production development process: This process involves manu-
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facturing specialists and engineers preparing plans for material

acquisition, production, warehousing, transportation and distribu-
tion. Planning for other supporting systems for controls, informa-
tion and human resources also come under this process.
Product evaluation and improvement: It is not simply enough to
launch the product. The product needs constant evaluation and
improvement to survive in the market. This process involves col-
lecting different types of data related to product failure and tech-
nical breakthroughs in materials. Moreover, necessary actions are
taken to improve the product as early as possible.
Product use and support development process: This process in-
volves developing a support system that will educate the users of
the product about its specific applications and provide warranty,
repair and replacement (in case of major faults depending on or-
ganisational policies) services.

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Exhibit
Meaning and Importance of Service Processes

Services include people, technology and processes required to
achieve customer satisfaction. Service processes include all those
activities that are designed to provide services as per customer
satisfaction. Managing service processes is a complex and difficult
task. This is due to the fact that service-oriented business deals
with intangibles and being intangible, it is subjected to individual
preferences. In order to deal with intangibles, separate strategies
should be developed and executed. The same strategy cannot be
used for each and every customer because each customer wants
customisation in services. Managing customisation in services as
per the demands of customers may require new and specialised re-
sources. Therefore, there should be a constant supply of resources
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in a minimum amount of time to accomplish customer demands.
For managing service operations, organisations use technology and
different processes coupled with specialised individuals to meet
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customer requirements in a short duration. Service processes are
important because they:
Provide an organisation with a clear roadmap of roles and re-
sponsibilities for each and every individual.
Enable employees to learn quickly and get on to the process of
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doing the job because everything is documented and well-main-

tained. This approach reduces learning time and enables em-
ployees to quickly become productive.
Help in reducing operating cost, as the cost involved in rework
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and redesign in case of defects is greatly reduced.

Assist an organisation in business expansion with a little time
for scalability because most processes are in control.
Bring transparency in operational processes.
Enable an organisation to work with increased efficiency be-
cause the roles, responsibilities and the authority are clearly
defined and documented.
Help an organisation to gain a competitive advantage because
rework time is greatly reduced.
1. A group of related tasks with specific inputs and outputs is

called ___________.
2. Capital intensity is the amount of capital and labour resources
that are required to be used in the production process. (True/
False)

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3. The ease to which resources are adjusted against the changes

in the market demand, technology, etc. is termed as ________.
a. Vertical integration
b. Capital intensity
c. Process flexibility
d. Customer involvement
Activity
Take an example of a renowned manufacturing organisation of

your choice. Using the Internet, find out how the organisation has
developed its processes to create value for customers, shareholders
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or society as a whole. Prepare a report on it.
5.3 TYPES OF PROCESSES

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In production, processes can be classified into four types as shown in
Figure 5.1:
Project
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Batch Production
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Mass Production
Continuous Production
Figure 5.1: Types of Processes
Let us discuss these different types of processes in detail.

1. Project: A project is a pre-determined set of activities with
a defined beginning and end to achieve a unique goal. It is
a temporary endeavour undertaken to produce a unique
product, service or result; usually one item at a time. A project
is of temporary nature in the sense that it is a pre-determined
set of activities with a definite beginning and a definite end.
Each project is unique, because it seeks to produce a product,
service, or result that is markedly different from all other similar
products or services. Therefore a project is highly customised
in nature and serves the need of a particular customer. Due to
its characteristics, a project usually takes long time to complete.

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Moreover, it involves a large investment of funds and resources

to produce customer’s order.
A project is a non-routine activity conducted by organisations
and individuals to achieve specific goals. For example, if an
organisation wants to find out the causes for decline in its
sales, it may conduct a survey to collect customer feedback and
determine the reasons for such decline. This survey, which is a
non-routine activity, is an example of a project. It has a specific
goal of determining the causes behind the decline in its sales.
Projects can be small or large, simple or complex. They can
be classified based on various parameters, such as size (small,
medium and large), level of complexity (easy, moderate and
complex), location (national or international), nature (industrial
or non-industrial) and industry segments (cement projects,
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telecommunication projects, refinery projects, steel projects and
fertiliser projects).
Irrespective of the type, all projects consist of a number of
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activities. Let us take the example of the customer survey
project mentioned earlier. This project may include functions
such as defining the sample group, determining the sample size,
designing a questionnaire, getting the questionnaire filled by
the target customers, taking personal interviews (if applicable),
analysing the feedback of customers, making a report, etc.
These activities can further be divided into tasks. For example,
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the activity of designing questionnaires may involve tasks such

as performing research on the suitability of various types of
questionnaires, finalising the questions, inserting the questions
in the Word processor, getting the questionnaires printed, etc.
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Thus, a project involves numerous activities and tasks that need

to be executed to achieve the objectives of the project. However,
the number of activities and tasks involved in a project depends
on the nature and scope of the project. For example, a market
survey project involves fewer activities compared to a new
airport construction project.
As every project has a unique goal, it intends to serve some
specific objectives of an organisation. For example, highway
projects undertaken by construction organisations are different
in terms of scope, time involved and requirement of resources as
compared to any other product development project undertaken
by an organisation.
2. Batch production: Making products one-at-a-time (as in case
of projects) can be time consuming and cost-prohibitive. To
deal with this issue, the batch production process can be used,
which performs different jobs through the production system
at the same time in batches or groups. In other words, batch
production is a production system that processes items in small
groups or batches. In batch production, products are usually

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made to customer order. The process is characterised by the

fluctuating demand and low order volume. Printers, bakeries,
machine shops, etc. are the few examples of batch production.
Most operations in batch production involve ‘making’ rather
than ‘assembling’. Depending on processing requirements, jobs
are sent through the system. For example, jobs requiring lathe
work are sent to one location, jobs requiring painting are sent to
another location, and so forth. Thus, a job may be routed through
many different machine centres before it is finished.
3. Mass production: Mass production is used by producers who
create more standardised products in larger quantities. In
other words, mass production is used to produce large quantity
of standardised products for mass market. As the products
are made-to-stock for a mass market, mass production is
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characterised by stable demand and high product volume.
Because of the steadiness and volume of demand, the production
system tends to be capital-intensive and highly repetitive, with
specialised equipment and limited labour skills.
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Mass production involves the following manufacturing process
arrangements:
Flow lines: Flow lines describe how a product moves (through
the system) from one workstation to the next in order of the
processing requirements. This is different from batch pro-
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duction as in batch production the processing requirements

are different for each customer order.
Assembly lines: An Assembly line denotes the way of arrang-
ing the mass production system. In mass production, most
operations are assembly-oriented and are performed in a line.
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Examples of products that are mass-produced include

automobiles, televisions, personal computers, fast food and
consumer goods.
4. Continuous production: Such production process is used to
produce a large volume of highly standardised products. The
system is highly automated and operations are performed
continuously 24 hours a day. The output is also continuous, and
the produced units are measured, rather than counted. Steel,
paper, paints, chemicals, etc. are a few examples of products
produced by continuous production. Organisations involved in
continuous production are referred to as process industries.
Continuous production is characterised by highly efficient
output, ease of control and enormous capacity of the system.
However, it also suffers from certain disadvantages, such as huge
investment in plant and equipment, limited variety of products,
inability of the system to adapt to volume changes, huge cost
involvement in correcting errors in production and difficulties in
keeping pace with new technology.

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Thus, as you move from project to continuous production, the

following features can be observed:
Demand volume increases
Products become more standardised
Systems become more capital intensive
Systems become more automated
Systems become less flexible
Customer involvement becomes less
Table 5.1 shows the characteristics of each type of process:

TABLE 5.1: TYPES OF PROCESSES
Project Batch Pro- Mass Pro- Continuous
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duction duction Production
Product Unique Customised Standard- Commodity
type ised
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Customer One at a time Few individu- Mass market Mass market
type al customers
Product Occasional Fluctuates Stable Highly stable
demand
Demand Very low Low to medi- High Very high
volume um
Variety of Infinite vari- Varied Few Very few
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products ety
Produc- Long-term Discrete Assembly Continuous
tion sys- projects lines
tem
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Equip- Wide-ranging General pur- Special pur- Highly auto-

ment pose pose mated
Type of Specialised Fabrication Assembly Mixing, treat-
work contracts ing, refining
Required Experts Wide range of Limited Equipment
labour skills range skills monitors
skills
Advantag- Customised Flexibility, fo- High speed Large capacity,
es work, use of cus on quality production, highly effi-
latest technol- efficiency, cient, ease of
ogy low cost control
Disadvan- Expensive, Expensive, Capital Difficult to
tages non-repetitive, not easy to investment, change, high
small custom- manage, slow lack of re- cost involved
er base process flow sponsiveness in correcting
the errors, lim-
ited variety
Example Construction, Print shops, Televisions, Paint, chem-
aircraft manu- bakeries, edu- computers, icals, steels,
facturing, ship cation, etc. fast food, etc.
building, etc. etc.

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4. Batch production is of temporary nature in the sense that it

is a pre-determined set of activities with a definite beginning
and a definite end. (True/False)
5. Which of the following process type is highly customised in
nature and serves the need of a particular customer?
a. Continuous production
b. Mass production
c. Batch production
d. Project
6. Printers, bakeries, machine shops, etc. are few examples of
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_________ production.
7. ____________ production is characterised by highly efficient
output, ease of control and enormous capacity of the system.
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Activity
Using the Internet, identify at least three organisations that are

involved in batch/mass/continuous production process. Find infor-
mation on the following for each organisation:
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Product type
Customer type
Product demand
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Variety of products
Production system
Type of work
Write a short note based on your findings.
5.4 PROCESS TECHNOLOGY

Process technology refers to the use of machines, equipment and de-
vices to operations for creating and delivering products/services. In
simple words, process technology is the application of equipment and
machinery to any operations process. Process technologies add value
to the creation of any product or service. Here, you should note that
process technology is different from product or service technology.
While talking of manufacturing operations, it is relatively simple to
distinguish the process technology from the product technology. Take
an example of manufacturing a computer. The product technology of
a computer is embodied in its hardware and software. However, the

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process technology here is the technology that assembles all different

components.
In service operations, it is often far more difficult to differentiate the

process technology from the service technology. Take examples of
theme parks like Disney World that uses flight simulation technolo-
gies in some of their rides. With the help of this technology, Disney
creates a realistic experience of space flight for its customers. Do you
think it is a service technology or process technology? Though, the
technology clearly processes customers, it is also a part of the service
that creates customer’s experience.
Process technology acts directly as well as indirectly on resource in-

puts to perform operations. Direct process technology helps directly in
creating the product/service. For example, Disney World’s flight simu-
lation technologies or body scanners at any hospital. Indirect process
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technology helps in managing processes that create a product/service.
In other words, indirect process technology helps in facilitating the di-
rect creation of products and services; for example, accounting system
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or stock control system of any organisation.
Process technology can be classified into three types:

1. Material processing technologies: For easy storage and
transportation, materials are processed into simple forms. For
example, metals are changed into sheets, bars or rods; timbers
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are cut into boards; and plastic materials are turned into plastic
boards and plastic strips, etc. The basic aim of processing
(cutting, forming, joining, etc.) materials is to make products
more suitable for customer’s needs. Thus, technologies, which
are used for processing materials, are called material processing
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technologies. The following points explain such technologies:

Computer Numerically Controlled (CNC) machine tools:
These tools perform metal-cutting and forming operations,
which are controlled by a computer.
Robots: These are ‘automatic position-controlled reprogram-
mable multi-function manipulators’ that perform several
tasks related to handling of materials, parts, tools or devices
through variable programmed motions.
Automated Guided Vehicles (AGVs): These are small, inde-
pendently powered vehicles, used to move materials to and
from value-adding operations.
Flexible Manufacturing Systems (FMSs): These are com-
puter-controlled semi-independent workstations, connected
by automated material handling and machine loading.
Computer-integrated Manufacturing (CIM): It is a manu-
facturing approach that uses computers to monitor and con-
trol the entire production process. It integrates different indi-

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vidual processes in order to exchange information with each

other and initiate actions.
2. Information-processing technology: It includes devices, used to
collect, manipulate, store or distribute information. The several
IT methods, which are used for this purpose involve:
Local Area Network (LAN) that helps in interconnecting
computers within a limited area such as a residence, school,
laboratory, office, etc.
The Internet that helps in accessing the World Wide Web
(www), which is the distributed hypermedia/hypertext sys-
tem
Extranet that helps customers, suppliers and banks to ex-
change information
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E-business that allows the use of the Internet-based technol-
ogy, either for supporting current business processes or for
creating entirely new business opportunities
M-business
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that combines broadband Internet and mobile
telephony devices
Decision Support System (DSS) that uses data storage and
models to structure information and present the consequenc-
es of decisions
3. Customer-processing technology: The technology is used to
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establish interface between customers, staff and the technology

itself. It either provides the immediate interface between
an organisation and its customers, such as in the case of a
bank Automated Teller Machine (ATM) or facilitates human
interaction with customers. Following are different forms of
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customer-processing technology:
Active interaction technology: This allows customers to
take control of the technology as the customer can tangibly
identify the active technology. Mobile phone services, Inter-
net-based ordering, e-mail, cash machines, etc. are examples
of active interaction technology.
Passive interaction technology: This type of technology ‘pro-
cesses’ customers and therefore, controls them by limiting
their actions in some aspects. For example, being a passenger
in aircraft or going to watch movie in theatre are some exam-
ples where customers are guided and thus, interact with the
technology. But, the customers do not hold control over the
technology and it is the technology that constrains the cus-
tomer’s actions in one way or another.
Hidden interaction with technology: This type of technolo-
gy is used to track customer’s movement in an unobtrusive
way. Customers neither directly interact with such technol-
ogies, nor the technologies affect customers’ actions openly.

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Security cameras, retail scanners and credit card tracking

are a few examples of such technologies.
Interaction through an intermediary: It is very common
type of interaction that takes place between an organisation
and customers with the help of technologies. Call centre tech-
nology and travel booking system is a couple of examples,
where interaction takes place with the help of an interme-
diary. This type of technology provides more flexible service
benefits to customers.
Process technology is greatly characterised by the degree of automa-

tion of the technology. Automation refers to the use of computers and
other automated machinery to execute business-related tasks. In oth-
er words, the course of making machines and processes self-operat-
ing is called automation. Increasing competition, varying demands of
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customers, pressure of quality output and improved productivity, are
some major reasons that compel organisations to automate their pro-
duction and operations system. Let us now discuss how automation is
performed in manufacturing and service industry.
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5.4.1 AUTOMATION IN MANUFACTURING
From the past few decades, technology has changed the nature of
manufacturing. In old days, manufacturing was done manually. How-
ever, today, manufacturers are using machine automation to produce
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quality products faster and more efficiently. The automated machin-

ery can be anything, ranging from a simple sensing device to a robot
or other sophisticated equipment that may help the manufacturing
organisation in the automation of a single operation or an entire man-
ufacturing process.
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In today’s manufacturing world, automation has become the deter-

mining factor for generating a competitive advantage. It has allowed
manufacturing organisations to mass produce products rapidly with
great repeatability and quality. The biggest benefit of automation is
that it improves quality, accuracy and precision by saving labour and
energy. In manufacturing, automation is achieved by various means
including mechanical, hydraulic, pneumatic, electrical, electronic de-
vices and computers. Various modern facilities, which are involved in
complicated manufacturing systems, typically use all these techniques
collectively. Automation in manufacturing helps in the following ways:
Reduction in production time: Automation speeds up the produc-
tion time as the machine is programmed to work in a certain way.
Increase in accuracy with less human error: An automated ma-
chine, which is programmed to perform a task repeatedly, helps in
increasing the accuracy compared to an employee. Moreover, as a
machine performs tasks, the chance for making mistakes becomes
less. By avoiding human error, the quality of product can also be
improved.

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Reduced costs: Automation increases power saving capabilities

and thereby, reducing the cost of production. Moreover, an auto-
mated system reduces the dependability on employees. This ulti-
mately lessens the overall cost of an organisation that occurs on
hiring, payroll, benefits, sick days, etc.
Increased safety: In the manufacturing industry, worker safety
has long been one of the biggest concerns. By switching to au-
tomated manufacturing processes, organisations perform with
much reduced level of error, which ultimately helps in making the
work-environment safer.
Higher volume production: Automation increases productivity
by avoiding manual delays and achieving the optimum efficiency
of the machine. It avoids reprocessing, which ultimately increases
productivity. Moreover, as automation gives useful data of the ma-
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chine, the possibility of analysing the cause of low or poor produc-
tivity increases. An organisation by identifying and eliminating
such cause, can improve its productivity.
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5.4.2 AUTOMATION IN SERVICES
Today service industries form an essential part of the economy of any

country. The service industry includes businesses and organisations
involved in food and hospitality services, health care, wholesale and
retail trades, education, entertainment, social and support services,
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banking and financial services, transportation, IT and BPO services,

etc. Automation has helped the service industry in improving its per-
formance and delivering quality services to the consumers.
Automation helps in reducing the number of staff and work hours

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required to provide a service. Moreover, with the help of automated

processes, organisations can mechanise tedious and time-consum-
ing tasks and thereby reducing the cost as well as the amount of time
used in manual labour. Take an example of ATM that not only pro-
vides faster and more convenient banking services to customers, but
also saves a bank employee’s time, which he/she can use to carry out
other tasks. Thus, automation helps businesses to remain competitive
by producing greater output at lower cost. In service industries where
human contact is an essential component, automation provides addi-
tional time to workers so that they could assist customers with more
complex issues.
Automation also helps in standardisation of service processes by sub-

stituting capital for labour like in case of ATM; or by establishing a
routine for labour like self-service and billing in supermarkets. The
standardisation of services promotes reliability, effectiveness, trust
and improved efficiency. Standardisation not only reduces costs, but
also increases consistency. Thus, with the help of automated service
processes, customers can get standardised services in a clearly struc-

n o t e s
tured manner. Moreover, automation of service processes offer organ-

isations the opportunity to expand by giving the ability to offer more
services and meet increased consumer demand.
However, unlike manufacturing industries, where various manufac-

turing activities could be automated (given technical considerations),
automation in service organisation is not that simple. Within a man-
ufacturing facility, work performed by welders, cutters, solderers and
brazers has the technical potential for automation. However, for a cus-
tomer-service organisation, feasibility becomes very low.
Even then, many service organisations are now focusing to automate

their processes to achieve competitiveness. If you talk of service in-
dustry, it is the accommodation and food service, which involves more
than half of all labour time. The activities that workers perform in food
service and accommodations have certain potential for automation,
S
based on technical considerations. This involves preparing, cooking,
or serving food; cleaning food preparation areas; preparing hot and
cold beverages; and collecting dirty dishes. Some of this potential has
IM
long been in use as restaurants are now testing new, more sophisti-
cated automation concepts, like self-service ordering or even robotic
servers. Take an example of Momentum Machines that has made a
hamburger-cooking robot, which can assemble and cook 360 burgers
an hour. Moreover, the device could automate a number of cooking
and food-preparation activities.
M
Apart from accommodation and food service, retailing is another

major sector in service industry with a high technical potential for
automation. Technology-driven stock management and logistics can
help retailers immensely in performing their tasks more efficiently.
N
For example, installing a bar code scanner in checkout lanes of a re-

tail store is an example of automating the checkout procedure. This
code helps in the identification and tracking of products at the store
just by entering the Stock Keeping Unit (SKU) number. SKU helps in
managing the inflow and outflow of the stock by giving them a unique
identification. In addition, automation has great scope in maintaining
records of sales, gathering customer or product information, and oth-
er data-collection activities.
Exhibit
Automation Tools used in Manufacturing and

Service Industries
PLC: A programmable logic controller, PLC, or programmable
controller is a digital computer used for automation of typically
industrial electromechanical processes, such as control of ma-
chinery on factory assembly lines, amusement rides or light fix-
tures.

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Sensors: A sensor is a transducer that converts a physical stim-

ulus from one form into a more useful form to measure the stim-
ulus.
Actuators:Hardware devices that convert a controller com-
mand signal into a change in a physical parameter.
Drives: Whenever something must be moved, a motor is usually
at the source of most automated equipment. There are many
types of AC and DC motors.
SCADA: SCADA (Supervisory Control and Data Acquisition) is
a system that operates with coded signals over communication
channels so as to provide control of remote equipment (using
typically one communication channel per remote station.
Networking: Network automation is the use of IT controls to
S
supervise and carry out every-day network management func-
tions. These functions can range from basic network mapping
and device discovery to network configuration management
IM
and the provisioning of virtual network resources.
Source: http://www.ejaet.com/PDF/3-2/EJAET-3-2-45-47.pdf
8. _______________ is an application of equipment and machinery

M
to any operations process.

9. Passive interaction technology ‘processes’ customers and
therefore, controls them by limiting their actions. (True/False)
10. __________ refers to the use of computers and other automated
N
machinery to execute business-related tasks.

11. Automation helps in reducing the number of staff and work
hours required to provide a service. (True/False)
Activity
Take an example of a leading organisation from the hospitality

industry. Using the Internet, find how automation has helped the
organisation in improving its performance and delivering quality
services to consumers. Prepare a presentation on it.
5.5 PROCESS IMPROVEMENT

Improvement involves a course of actions intended to make something
better by bringing certain changes. Since the implemented changes
have an overall impact in a product or service, the term improvement,
however small, will keep the entire process impacted. Hence, the word
improvement is aligned with the word ‘process’.

n o t e s
Process, as you have already studied, is a sequence of activities in-

volved in converting inputs into output. Process elements interact
continuously with each other to produce the desired output.
Process improvement is an ongoing practice that identifies, analyses

and improves existing business processes within an organisation to
meet new standards of quality. It involves a systematic approach to
focus on different areas of improvement and uses different methods to
achieve the best results. Processes can either be added with sub-pro-
cesses or even eliminated for achieving the ultimate goal of improve-
ment.
The outcome of process improvement can be measured in terms of de-

velopment in product quality, customer loyalty, customer satisfaction,
increased productivity, increased efficiency and profit, development
of the skills of employees, higher and faster Return on Investment
S
(ROI), etc.
5.5.1 APPROACH TO IMPROVEMENT
IM
Two approaches to achieve process improvement are shown in
Figure 5.2:
Continuous Improvement (CI)

M
Breakthrough Improvement
N
Figure 5.2: Approaches to Achieve Process Improvement
Let us discuss these approaches in detail.
CONTINUOUS IMPROVEMENT (CI)
Continuous improvement can be defined as an on-going effort of im-

proving products, services and processes of an organisation. To do so,
an organisation needs to continuously manage its processes, identify
problems and eliminate them. CI encompasses all the processes and
departments of an organisation like engineering, information technol-
ogy, finance, commercial, marketing, purchasing, manufacturing, etc.
CI follows the top-to-down approach as the top management initiates
and supports the process. It requires the participation of all the em-
ployees of an organisation. Following are the main aspects of CI:
Understanding the tools and techniques required for the CI, such
as six sigma and Just-in-Time (JIT)
Building and nurturing strong continuous improvement culture in
the organisation across the organisational hierarchy

n o t e s
Building customer-focus which is the ability to anticipate custom-

er needs and requirements
Showing strong commitment and leadership across all the depart-
ment
Focusing on quality as well as on cost and timing
Defining and scheduling the breakthrough improvements in the
system
Linking of business strategies and results towards CI
CI focuses on structure, process and evaluation, which in turn, work

on efforts to identify and improve the root cause of problems, inter-
vene to reduce or eliminate these causes and take steps to correct the
process. In spite of being a challenging task, CI provides many bene-
fits to an organisation. Some main benefits of CI are:
S
Reduction in the waste through prevention of errors
Improvement in product quality
IM
Reduction in the rework time
Reduction in the cycle time
Faster response time, i.e., fulfilling customer orders on time
Competitive edge by bringing down costs
M
Higher customer value and satisfaction

Higher employee motivation
In CI, size or rate of improvement is not important. What does re-

ally matter in CI is that improvement should be ongoing and every
N
month/week/quarter or whatever period is appropriate, some kind of

improvement must take place.
BREAKTHROUGH IMPROVEMENT
Unlike continuous improvement, breakthrough improvement focuses

on discontinuous changes. Breakthrough improvement results from
creative and innovative thinking and is often motivated by stretch
goals. Stretch goals compel an organisation to think in an innova-
tive and creative manner to encourage improvements. Take the ex-
ample of an organisation that has set 10 per cent improvement goal.
Organisations usually meet such goals by implementing some minor
improvements. Now, if the improvement goal is 1,000 per cent, the or-
ganisation would require thinking out of the box to achieve the goal.
The seemingly impossible goals can be achieved by boosting employ-
ee morale and generating dramatic improvements. Take the example
of Motorola which used Six Sigma to achieve the goal of improving the
quality of its products ten times in just two years.

n o t e s
The impact of breakthrough improvement is relatively sudden and

shows a step change in practice. Not only this, but such improvements
also demand high investment of capital. As these improvements may
involve frequent changes in the product/service or process technolo-
gy, they can disrupt the on-going working of the current operations.
Due to huge investments in terms of capital and time, breakthrough
improvement projects are typically run by a steering group, which in-
volves a set of top-level managers who have enough expertise to run
such projects. Breakthrough improvement projects result in maxi-
mum economic return in the short to medium terms.
Breakthrough improvement focuses highly on creative solutions,
which further supports the idea of involving novel and liberal think-
ing. This differentiates it from continuous improvement, which is less
ambitious and non-radical in nature. Continuous improvement prin-
S
ciples focus on non-stop improvements, irrespective of the improve-
ment size, rate or type. Thus, such improvements can be implemented
by anyone and everyone in the organisation with an aim of improving
IM
the working processes and practices. However, this is not in the case
of breakthrough improvement. The breakthrough improvement prac-
tices require expertise and competence for sprinting. Table 5.2 shows
major features of continuous and breakthrough improvement:
TABLE 5.2: FEATURES OF CONTINUOUS AND

BREAKTHROUGH IMPROVEMENT
M
Continuous Breakthrough
Improvement Improvement
Effect Long-term and steady Short-term and rapid
Pace Small steps Big steps
N
Time frame Continuous Discontinuous

Change Gradual and continual Abrupt and instable
Involvement Everybody Only experts
Approach Group effort and system Individual ideas and effort
approach
Source of Conventional know-how New inventions, technologi-
motivation and work-proficiency cal inventions
Risk Wide-ranging Concentrated
Requirements Little investment but great Large investment but little
effort to maintain the im- effort to maintain the im-
provement provement
5.5.2 STEPS IN IMPROVEMENT
As you know, process improvement is a systematic approach and in-
volves a number of steps, which are:
1. Identifying the core outputs mandatory for customer satisfaction;
for example, the core outputs of a restaurant can be the taste and
the quality of the food and beverages served

n o t e s
2. Investigating how input variables (the A’s) affect core outputs,

i.e., goods and services; for example, this step would involve
checking the quality of raw materials used in preparing food in
the restaurant
3. Reducing variation by identifying causes and monitoring and
controlling key process inputs; for example, in a restaurant,
quality improvement can be achieved by consistently monitoring
the causes of the quality issues and ensuring the right quality of
inputs, such as fruits, vegetables, spices, etc.
5.5.3 STRATEGIES FOR IMPROVEMENT
An improvement strategy sets out overall objective of quality to en-

sure that all improvement in a system is well planned, managed, mea-
sured and monitored for the achievement of outcomes for customers.
S
Areas of improvement in an organisation are:
Reduction in manufacturing costs
Reduction in cycle time
IM
Reduction in downtime
Reduction in changeover time
Improvement in the flow of communication
Improvement in productivity
M
Increase in capacity
The objectives of an improvement strategy are:

Making improvement as an integral part of system and inculcate it
N
into the company culture

Ensuring customer satisfaction
Monitoring the impact of quality improvement activities from the
perspective of the organisation and its customers
There are mainly four improvement strategies: repair, refinement,

renovation and reinvention. Let us discuss these strategies in detail.
REPAIR
Repair involves fixing of any sort of device or equipment etc. which is

out of order or broken. Therefore, it emphasises keeping the device
in a working order either by scheduled or preventive maintenance.
Repair involves combined efforts of technical, administrative, mana-
gerial and supervision staff. For example, you do a service of the car in
a stipulated distance covered or a time.

n o t e s
REFINEMENT
Refinement involves continuous improvement of the process which

is not broken or out of order. In other words, it involves incremental
improvements in products, processes and services. Refinement is ap-
plicable at an individual level as well as team level.
An important benefit of refinement is that it faces little or no resis-

tance from employees. However, at times refinement only results in
small improvement which is not recognised by management. For ex-
ample, there may be an easier way to do a task that will improve the
process.
RENOVATION
Renovation strategy brings in major breakthrough in quality improve-
S
ment. In renovation, improvement happens through improved focus
and systematic exploitation of opportunities. In other words, the ren-
ovation strategy inculcates major changes in the existing systems and
IM
processes in an organisation. Therefore, as you can see this approach
is significantly different from the earlier approaches as that focus more
on refining or repairing the existing processes. Renovation heavily re-
lies on scientific methods and technologies. Therefore, renovation is
more expensive to apply. For example, if a manufacturer renovates the
production process by installing more technologically sophisticated
machineries, control systems etc. rather than repairing or refining the
M
existing system, it would naturally be more expensive.
REINVENTION
N
Reinvention is a commonly used term in engineering disciplines. It

means duplication of basic method that has previously been created
or optimised. It is a highly demanding and expensive improvement
strategy. It emphasises the development of new methods and process-
es to improve quality and increase customer satisfaction. For example,
mobile manufacturers continuously come with new designs and ver-
sions of mobile phones to capture market and provide more satisfac-
tion to customers.
12. _______________ principles focus on non-stop improvements,

irrespective of the improvement size, rate or type.
13. Breakthrough improvement can be implemented by anyone
and everyone in the organisation with an aim to improve
working processes and practices. (True/False)

n o t e s
Activity
Visit a retail store in your vicinity. Observe how quality improve-

ment strategies are implemented by the store. Write a brief note
on it.
5.6 SUMMARY
A process is a group of related tasks with specific inputs and
output.
Product refers to a good or service that satisfies the needs and
wants of customers.
For a manufacturer, a product is a combination of various process-
es or operations. It is the manufacturer who determines processes
S
and operations which are deployed to create the product.
Processes are developed to create value for customers, sharehold-
ers or society as a whole.
IM
An organisation requires developing the process strategy for:
Vertical integration
Capital intensity
Process flexibility
M
Customer involvement
In production, processes can be classified basically into four types,
which are:
Project
N
Batch production
Mass production
Continuous production
A project is a pre-determined set of activities with a defined begin-
ning and end to achieve a unique goal.
Batch production is a production system that processes items in
small groups or batches.
Mass production is used by producers who create more stan-
dardised products in larger quantities.
A continuous production process is used to produce a large vol-
ume of highly standardised products.
Process technology refers to the use of machines, equipment and
devices to operations for creating and delivering products/services.

n o t e s
Process technology acts directly as well as indirectly on resource

inputs to perform the operations. Direct process technology helps
directly in creating the product/service. Indirect process technol-
ogy helps in managing processes that create the product/service.
Process technology can be classified into three types:
Material-processing technologies
Information-processing technology
Customer-processing technology
In today’s manufacturing world, automation has become the de-
termining factor for generating competitive advantage.
Automation has allowed the manufacturing organisations to mass
produce products at outstanding speed and with great repeatabil-
S
ity and quality.
Automation in manufacturing helps in the following ways:
Reduction in production time
IM
Increase in accuracy with less human error
Reduced costs
Increased safety
Higher volume production
M
With the help of automated processes, service organisations can

mechanise tedious and time-consuming tasks and thereby reduc-
ing the cost and the amount of time used in manual labour.
Improvement involves a course of actions intended to make some-
N
thing better by bringing certain changes.

Process improvement is an ongoing practice that identifies, analy-
ses and improves existing business processes within an organisa-
tion to meet new standards of quality.
The two approaches to achieve process improvement are:
Continuous improvement (CI)
Breakthrough improvement
Continuous improvement can be defined as an on-going effort of
improving the products, services and processes of an organisation.
Unlike continuous improvement, breakthrough improvement fo-
cuses on discontinuous changes.
Breakthrough improvement focuses highly on creative solutions,
which further supports the idea of involving novel and liberal
thinking.

n o t e s
Process improvement is a systematic approach and involves a

number of steps, which are:
1. Identifying the core outputs mandatory for customer
satisfaction
2. Investigating how input variables (the A’s) affect core outputs
3. Reducing variation by identifying the causes and monitoring
and controlling key process inputs.
The four major improvement strategies are:
Repair
Refinement
Renovation
Reinvention
S
key words
IM
Extranet: A private network that with the help of Internet tech-
nology and the public telecommunication system, shares a sub-
set of the information with partners, vendors and suppliers or
customers.
Marketing mix: A general term for a set of marketing activities
used to promote and sell a product into the market.
M
M-business: A commercial transaction that takes place elec-

tronically through mobile phone.
Process strategy: The pattern of decisions made to manage
processes to achieve competitive goals.
N
Quality: A measure of how closely a good or service conforms to

a specified standard.
Reliability: The probability of survival of a product under a giv-
en operating environment.

1. Discuss the need of developing processes for producing a
product/service.
2. Explain the different types of processes in production.
3. What do you understand by process technology? What are the
different types of process technologies?
4. Explain the role and importance of automation for manufacturing
as well as service organisations.
5. Discuss the major approaches to achieve process improvement.

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Product and Process 1. Process
2. True
3. c. Process flexibility
Types of Processes 4. False
5. d. Project
6. Batch
S
7. Continuous
Process Technology 8. Process technology
9. True
IM
10. Automation
11. True
Process Improvement 12. Continuous improvement
13. False
M

1. Processes are developed to create value for the customers,
shareholders or society as a whole. They depict an organisation’s
N
overall approach to physically produce products and services.

Refer to Section 5.2 Product and Process.
2. In production, processes can be classified basically into four
types, which are: project, batch production, mass production and
continuous production. Refer to Section 5.3 Types of Process.
3. Process technology refers to the use of machines, equipment
and devices to operations for creating and delivering products/
services. Process technology can be classified into three types,
which include material-processing technologies, information-
processing technology and customer-processing technology.
Refer to Section 5.4 Process Technology.
4. Automation has allowed the manufacturing organisations to
mass produce products at outstanding speed and with great
repeatability and quality. With the help of automated processes,
service organisations can mechanise tedious and time consuming
tasks and thereby reducing the cost as well as the amount of time
used in manual labour. Refer to Section 5.4 Process Technology.

n o t e s
5. The two approaches to achieve process improvement include

continuous improvement (CI) and breakthrough improvement.
Refer to Section 5.5 Process Improvement.
SUGGESTED READINGS
S
Kale,
E-REFERENCES
IM
Automation in the Service Industry. (2017). Smallbusiness.chron.
com. Retrieved 27 June 2017, from http://smallbusiness.chron.com/
automation-service-industry-37635.html
Breakthrough Improvement. (2017). Isixsigma.com. Retrieved 27
June 2017, from https://www.isixsigma.com/dictionary/break-
M
through-improvement/
How Automation Will Change the Services Industry | Sherpas in Blue
Shirts - Everest Group. (2017).Everest Group. Retrieved 27 June
2017, from http://www.everestgrp.com/2015-03-how-automation-
N
will-change-the-services-industry-sherpas-in-blue-shirts-16793.
html/
Process Technology Presentation | Business Process | Automation.
(2017). Scribd. Retrieved 27 June 2017, from https://www.scribd.
com/doc/36111171/Process-Technology-Presentation
Where machines could replace humans--and where they can’t (yet).
(2017). McKinsey & Company. Retrieved 27 June 2017, from http://
www.mckinsey.com/business-functions/digital-mckinsey/our-in-
sights/where-machines-could-replace-humans-and-where-they-
cant-yet

N
M
IM
S
C h a
6 p t e r
STRATEGIC CAPACITY MANAGEMENT
CONTENTS
S
6.1 Introduction
6.2 Capacity Management in Operations
IM
6.2.1 Determining Capacity Requirements
Activity
6.3 Capacity Planning
6.3.1 Time Horizons for Capacity Planning (Long, Intermediate and Short
Term)
M
6.3.2 Capacity Focus

6.3.3 Capacity Flexibility
Activity
N
6.4 Planning Service Capacity

6.4.1 Capacity Utilisation and Service Quality
Activity
6.5 Summary

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CAPACITY PLANNING AT TESLA
S
Source: www.electrek.co
Established in Silicon Valley in 2003 by a group of engineers, Tes-

la, Inc. (formerly named Tesla Motors) is an automobile manu-
IM
facturing company. Named after a Serbian electrical engineer
and physicist, Nikola Tesla, Tesla, Inc. was formed with an idea
of making fuel efficient electric cars that could run only on re-
chargeable batteries with zero emissions. Headquartered in Palo
Alto, California, Tesla employs around 33,000 employees with to-
tal revenue of US$7 billion in 2016. The company aims at manu-
facturing cars that could reduce dependence on petroleum-based
M
transportation. The mission of the company is to accelerate the

world’s transition to sustainable energy.
Tesla first gained extensive attention in 2008 for the production of

the first electric sports car ‘Roadster’. In 2012, the company came
N
up with an electric luxury sedan- ‘Model S’. The Model S proved

to be the world’s best-selling plug-in electric car for two con-
secutive years, 2015 and 2016. In September 2015, the company
presented a crossover SUV ‘Model X’. Moreover, the automobile
manufacturer designed its fourth vehicle for the mass-market and
named it ‘Model 3’. The Model 3 was unveiled in March 2016, and
its production started in July 2017. As of December 2016, Tesla
has sold over 186,000 electric cars worldwide (since 2008). Today,
the company is ranked as the world’s second bestselling manufac-
turer of plug-in electric cars after BYD Auto.
To achieve its goal of accelerating the world’s transition to sus-

tainable energy, the company needed to produce electric vehicles
in sufficient volume to bring change in the automobile industry.
With a planned production rate of 500,000 cars per year, the com-
pany required to produce enough lithium ion batteries. In 2014,
Tesla, in order to meet the growing energy demand, planned to
build the world’s largest battery factory at the cost of US$4–5 bil-
lion. Tesla named it ‘Gigafactory’.

STRATEGIC CAPACITY MANAGEMENT 179
n o t e s
Source: www.inhabitat.com
S
The name ‘Gigafactory’ derives from Tesla’s planned annual bat-
tery production capacity of 35 gigawatt-hours (GWh). “Giga” is
a unit of measurement that represents “billions”. Tesla started
working on the Tesla Gigafactory in June 2014 outside Sparks,
IM
Nevada. Tesla expects to begin battery cell production by the end
of 2017. The company also expects that by 2018, the Gigafactory
will reach its full capacity and produce enough batteries to meet
the requirements.
Once completed, the Gigafactory would cover around 10 million

square feet with more than 6500 workers. As per the expectations,
M
the facility would manufacture the 18/650 cell, a cylindrical bat-

tery format that is 18 mm wide and 65 mm tall. Around 8000 such
cells are required by Tesla for its Model S cars. The Gigafactory
would also support the production of a third-generation Tesla car
N
that would be a smaller version of the Model S.
With the supplier partner Panasonic, the Gigafactory aims at:

Producing batteries for significantly less cost using the econ-
omies of scale
Innovating the manufacturing process
Reducing wastes
Optimising the process of locating most manufacturing pro-
cess under one roof
Tesla expects to drive down the per kilowatt hour (kWh) cost of
our battery pack by more than 30 percent. The Gigafactory will
also be powered by renewable energy sources, with the goal of
achieving net zero energy.
Source: https://www.tesla.com/gigafactory

n o t e s
learning objectives

>> Explain the concept of capacity management in operations
>> Discuss how to determine capacity requirements
>> Explain the concept of capacity planning
>> Classify capacity planning decisions based on different time
horizons
>> Explain the concept of service capacity planning
6.1 INTRODUCTION
In the previous chapter, you studied about process planning and im-
S
provement. In this chapter, let us discuss the role of strategic capacity
management in operations. Capacity is the capability of an individual
to perform a particular work in a given time period. For example, the
IM
amount of load you can lift for a specific period of time is your capaci-
ty. Similarly, the capacity of a sugar factory can be expressed in terms
of the tons of sugar cane (input) crushed per day or in terms of the
tons of sugar (output) produced per day.
Thus, capacity of a production plant refers to its ability to produce

output over a period of time under normal conditions. However, in
M
the case of organisations producing multiple products, capacity is

measured in terms of critical resource inputs, such as labour hours,
number of machines available, storage capacity, working capital and
logistics infrastructure.
N
Capacity management is a process of ensuring that the available ca-

pacity of a production facility is capable of fulfilling business require-
ments. Effective management of capacity helps an organisation to re-
duce the cost of production and increase its revenue. An organisation
can manage its capacity efficaciously only if it plans the capacity prop-
erly. Capacity planning is all about determining the level of capacity
required to manufacture a specific quantity of a product within a stip-
ulated time period.
In this chapter, you will study the concept of capacity and capacity
management in detail. Further, you will learn the concept of capac-
ity planning. You will also learn about the classification of capacity
planning based on different time horizons. At the end, you will study
the concept of service capacity planning and how service capacity
utilisation determines the level of service quality within a service
organisation.

n o t e s
CAPACITY MANAGEMENT IN
6.2
OPERATIONS
Capacity refers to the ability of a production unit to produce some-
thing using available resources within the given time period. The ca-
pacity of a production unit depends on the demand for products or
services, which is largely influenced by the location where products
and services are sold. For example, the demand for fast food is higher
in urban areas as compared to rural areas.
The capacity of a production unit is expressed in terms of input or

output. For example, the capacity of a car manufacturing organisa-
tion can be expressed as the number of cars produced per year. In
this case, capacity is expressed in terms of the output. On the other
hand, in situations where the output is too complex, the capacity is ex-
S
pressed in terms of the input. For example, the capacity of a hospital is
expressed in terms of the total number of beds. Here, you should note
that the capacity of a production facility depends on various factors,
IM
such as the demand, cost and scale of production.
While it comes to measurement, capacity is easy to measure in some

cases, for example, in case of a car manufacturing organisation where
it is easier to measure the number of cars (output) produced per day.
The concept of aggregation can also be used in these cases. Aggre-
gation implies using a standard average production rate expressing
M
capacity in terms of the standard product. However, in certain cases,

where measuring output is not that easier such as in case of an airline,
the capacity may be expressed by the total number of seats, which are
measured in terms of the input.
N
Future capacity needs can be viewed from a long-term or short-term

perspective. The forecast of demand for different products is based
on the past data and the actual orders received by the firm. The ex-
isting capacity is adjusted to meet the demand. When we go for the
long-term perspective, the requirements are fetched by either ex-
panding or shredding the extra capacity and some currently available
resources.
Let us now discuss how capacity is managed in production and oper-

ations.
Capacity management is all about ensuring whether the available ca-

pacity of a production facility is sufficient to meet business require-
ments effectively. It is necessary for an organisation to manage its ca-
pacity for a smooth working of its production processes. If the capacity
of an organisation is not managed properly, it may have an adverse
impact on its financial performance. Let us understand the manage-
ment of capacity in a production facility with the help of an example.
Suppose an organisation wants to prepare its production schedule.

n o t e s
For this, the production department of the organisation needs to de-

termine the available and required capacity of its production facility.
The department finds out that the available and required capacity of
the organisation does not match. Considering the present situation,
the production manager needs to take a decision in such a manner
that the organisation can run its production process effectively. In this
case, the production manager can take any of the following decisions:
Ignore the issue: The production manager can choose to ignore
the imbalance between the required and available capacity. This
decision may have two consequences, which are as follows:
If the available capacity of the production facility is not suffi-
cient to meet business requirements, there would be a pile of
pending orders. This would result in undue delay in the deliv-
ery of products.
S
If the available capacity is greater than the required capacity,
there would be a surplus of finished goods. This would lead
to a significant increase in different types of costs, such as the
IM holding cost of inventory and wastage cost.
Introduce changes in the required or available capacity: The
production manager needs to make alterations in the existing pro-
duction plans, master schedules, etc. Apart from this, the produc-
tion manager can also use the following alternatives to make alter-
ations in the existing capacity of the production facility:
M
Preparing an efficient production schedule

Using alternate routings, that is, ensuring production from a
different workstation instead of the one mentioned in the route
sheet
N
Shifting employees from the area having abundant capacity to

the area lacking capacity
Outsourcing manufacturing services
Employing contract labour according to the situation
Introducing or reducing additional work shifts
Purchasing new equipment or maintaining the existing one
Capacity management refers to short-term adjustments made in ca-

pacity so that it tallies with the forecast demand. Working time is cho-
sen for this. Overtime is used to increase the capacity and short time
to reduce it. There are a number of ways for ensuring capacity man-
agement in operations. These are as follows:
Working hours and shift management: As per the requirement,
management can change working hours and shifts.
Part-time staff: Part-time staff members can be deployed to meet
the peak demand.

n o t e s
Process adjustment: The process can be adjusted in such a man-

ner that the set up time is reduced.
Adjusting equipment and process: Work can be expedited and
slowed down by adjusting production processes.
Self-service: Customers can be encouraged to do some work, for
instance, use ATMs or pack their own bags in a hypermarket.
The abovementioned measures are short-term adjustments that in-

cur their own cost. Some of these also affect the manpower adversely.
These are temporary measures and should be exercised sparingly.
The capacity management process of an organisation begins with de-

termining capacity requirements. Let us discuss how to determine ca-
pacity requirements in detail in the next section.
S
6.2.1 DETERMINING CAPACITY REQUIREMENTS
An organisation can determine the capacity requirements of a pro-

IM
duction facility by converting its production schedule into standard
hours. Capacity requirement is determined based on various produc-
tion schedules as shown in Table 6.1:
TABLE 6.1: PRODUCTION SCHEDULE AND ITS UNIT OF

MEASUREMENT
Production schedules Production schedule’s Production units for
M
unit of measurement which the capacity re-

quirement is determined
Production plan Aggregate number of Organisation, facility
end items
N
Master schedule Number of end items Organisation, facility
Planned order sched- Number of parts and Department

ules for parts and assemblies
assemblies
Open order schedules Number of parts and Work centre/machine
for parts and assem- assemblies
blies
Another important factor for determining a capacity requirement is

the level at which the capacity should be defined. For example, the
estimation of capacity requirement at the machine level requires de-
tailed information of machine as compared to the estimation of capac-
ity requirement at the facility level. Therefore, capacity requirements
for different levels are determined using different methods based on
available information.

n o t e s
Exhibit
Types of Capacity
Capacity can be of different types, which are as follow:
Fixed capacity: Capital assets of an organisation at a particular
time are known as fixed capacity. These assets are not liable
to change within the short or intermediate range of production
planning.
Adjusted capacity: It entails the size of the workforce, employ-
ee working hours on a weekly basis and the number of shifts
and the extent of sub-contracting.
Design capacity: It is the planned rate of the output of goods or
services under normal or full-scale operating conditions. It is
S
also known as installed capacity.
Theoretical capacity: It is a kind of idealised goal that can rare-
ly be achieved practically. It may also be defined as the rate of
IM work to be achieved during the functioning of machine at its
full-rated speed for 100 per cent of the time.
System capacity: It refers to the optimal output of certain prod-
ucts or services, or a mix of product and services, which a pro-
duction system is able to produce at a given point of time.
Potential capacity: It is the capacity that can be made available
M
within the decision horizon of the top management. For exam-

ple, it helps senior management in making decisions about the
growth of business, investment, etc.
Immediate capacity: It is the capacity that can be made avail-
N
able within the current budget period.

Effective capacity: It is the maximum rate of output that can be
practically achieved. Effective capacity is always lesser than the
design capacity. It is used within the current budget period. It is
also known as practical capacity or operating capacity.
Actual or utilised capacity: It is the actual output achieved
during a particular time period. The actual output may be less
than the rated output. The reason for this may be actual de-
mand, employee absenteeism and low productivity levels.
1. If the output is too complex, capacity can be expressed in

terms of the input. (True/False)
2. _________ is all about ensuring whether the available capacity
of a production facility is sufficient to meet the business
requirements effectively.

n o t e s
3. If the available capacity is greater than the required capacity,

there would be surplus of finished goods. (True/False)
4. An organisation can determine the capacity requirements of
a production plant by converting its production schedule into
___________________.
Activity
Take an example of an IT-based organisation. Using the Internet,

identify how the organisation manages its capacity. Prepare a short
note based on your observation.
6.3 CAPACITY PLANNING
S
Capacity planning refers to a process of determining the level of ca-
pacity required to manufacture a specific product with a defined
quantity. There are several factors that can affect capacity planning.
IM
These factors include the number of workers and their skills, number
of machines, productivity of employees, number of suppliers, govern-
ment regulations and preventive maintenance.
The process of capacity planning involves a number of activities to

be performed in a sequential order. These activities are shown in
Figure 6.1:
M
Identifying demand
N
Measuring the current capacity of the production plant
Determining alternative methods for making alterations

in the capacity of the production plant
Performing the financial, economic and technical analysis

of the alternative methods
Selecting and implementing the best alternative
Figure 6.1: Capacity Planning Process
Let us now discuss the major advantages of capacity planning as fol-

lows:
Helpsin meeting the demands of customers on time: If the de-
mand exceeds in a particular time period, it can be fulfilled by

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planning production capacity in advance. More resources can be

arranged prior to the commencement of the production process.
Increases the efficiency of business operations: Advanced capac-
ity planning helps in a smooth functioning of business operations,
as the production process gets organised due to capacity planning.
Makes the scheduling system more effective: It helps in creat-
ing delivery schedules for supplies and shipping schedules for fin-
ished goods.
Helps in monitoring costs: Carefully planned capacity helps the
organisation to monitor its cost during the growth or recession pe-
riod.
Helps in setting up a new facility: The needs of facilities and per-
sonnel can be more accurately identified by using the data of the
S
capacity planning of the existing facility.
6.3.1 TIME HORIZONS FOR CAPACITY PLANNING (LONG,

IM INTERMEDIATE AND SHORT TERM)
Capacity planning decisions of an organisation can be classified into

three different categories based on time horizons. These three types
are discussed as follows:
Long-term capacity planning: It is concerned with accommo-
dating major changes that affect the overall level of output in the
M
long run. It involves decisions with respect to the overall capacity,

such as facility size, acquisition or disposal of equipment, build-
ings and facilities. Long-term capacity decisions are taken when
an organisation plans to produce a new product or expand the ex-
N
isting product. These decisions may lead to major changes in the

overall capacity of the production facility. Therefore, while taking
long-term capacity decisions, it is important for an organisation to
estimate the demand accurately and implement various strategies
for meeting the demand.
Intermediate-term capacity planning: Intermediate-term capac-
ity planning is also known as aggregate planning. It is the process
of planning the quantity and timing of output over an intermediate
time horizon (3 to 18 months). Within this range, physical facilities
are assumed to be fixed for the planning period.
Intermediate-term capacity planning focuses on products in an
aggregate manner and not as individual. Take the example of a
paint manufacturer that produces different colours of paints. In
the case of intermediate-term capacity planning, the plan will in-
clude forecasting demand for the total quantity of paint and not
for the different colours of paint separately. Such type of planning
is done by organisations to make more accurate decisions about
their capacity as it is often difficult to predict seasonal variations
in demand. Thus, the forecasts of product demand in intermedi-

n o t e s
ate-term capacity planning are more close to the actual demand of

product in future.
Intermediate-term capacity planning aims at keeping the costs of
operations at a minimum. It matches resources with the expected
demand by taking into account a diverse amount of factors, such
as decisions on output rates, overtime, employment levels and
changes, inventory levels and changes, back orders and subcon-
tracting work.
Short-term capacity planning: It involves decisions with respect
to production schedules, workforce levels and overtime. Such type
of planning is done by organisations for a daily, weekly or quarter-
ly time frame. Generally, the fundamental capacity of a production
facility is fixed for short-term durations. Major facilities of the pro-
duction facility do not change while small alterations in the capaci-
S
ty are quite possible. Different ways of adjusting capacity based on
the varying demands in the short-term time horizon are as follows:
Use of overtime or idle time
IM
Increasingthe number of shifts per day to meet a temporary
strong demand
Sub-contracting to other firms
Apart from these three basic types, capacity planning can also be clas-
sified as:
M
Finite capacity planning: While fixing the time period according

to customers’ required delivery date or processing cycle, one can
plan backwards to accommodate these times. This type of plan-
ning is known as finite capacity planning. Time and capacity are
two conflicting constraints in finite capacity planning.
N
Infinite capacity planning: If the time of processing is not a con-

straint, as in the case of the MTO (Make-to-Stock) production sys-
tem, a forward plan based on the finite capacity is created. This
type of capacity planning is known as infinite capacity planning.
6.3.2 CAPACITY FOCUS
The capacity focus concept is operationalised in a production facility

through the ‘Plants within Plants (PWPs)’ system. Such organisations
focus on fairly limited set of production objectives. A capacity focused
production facility may have multiple PWPs, each of which may per-
form with separate equipment, process policies, workforce, produc-
tion methods and so on (even if performing under the same roof). The
focus concept helps in finding the best operating strategy for each unit
of the production facility. As each PWP focuses on its own production
objectives, it does not have to be concerned about excelling in other
areas of manufacturing performance. This allows each PWP in spe-
cialising in their assigned tasks and accomplishing those tasks in the
most efficient manner to meet the operations objectives.

n o t e s
Here, you must note that capacity focus can only be used in cases
when having the full range of capabilities is not necessary or when the
production facility has several sub-facilities (PWPs), each with their
own methods, policies and equipment. Only in these cases, the best
operating level could be determined for each sub-facility and the fo-
cus concept could be carried down to the operational level.
6.3.3 CAPACITY FLEXIBILITY
Capacity flexibility refers to an ability of an organisation to rapidly

increase or decrease the production level or revise production capa-
bility swiftly from one product to another. In other words, capacity
flexibility allows an organisation to easily change production levels or
switch between product types. Such flexibility in production can be
achieved through the following means:
S
Flexible facility: The facility is called flexible if it is able to de-
crease the changeover time to zero by using movable equipment
and utilities that can be easily accessed and routed. Such facilities
IM
can adapt quickly to any changes.
Flexible processes: An organisation is said to have flexible pro-
cesses when it consists of the flexible manufacturing system and
simple and easy set-up equipment. It allows the organisation to
have low-cost switching between products referred to as the econ-
omies of scope (an economy of scope is achieved when multiple
M
products are produced at a lower cost in combination than sepa-

rately).
Flexible workers: Flexible workers are employees who possess
multiple skills. Employees with a variety of skills can be used to
N
perform different tasks efficiently. Flexible workers can switch

from one task to another quickly and competently. Unlike special-
ised workers, these workers receive a broad level of training that
helps them in the quicker adaption of changes in their work as-
signments.
5. Capacity planning helps in meeting the ___________ of

customers on time.
6. __________ and___________ are two conflicting constraints in
finite capacity planning.
7. Which of the following factors does not affect capacity
planning?
a. Number of machines
b. Productivity of employees

n o t e s
c. Government regulations
d. None of these
8. Intermediate-term capacity planning is also known
as_________________.
9. ________________allows an organisation to easily change the
production levels or switch between product types.
Activity
Take an example of a confectionery company. Using secondary

sources identify how the organisation plans the capacity of the pro-
duction plant to meet the customers’ demand in festive seasons.
Make a presentation on it.
S
6.4 PLANNING SERVICE CAPACITY
IM
Service capacity refers to a service system’s ability to deliver the in-
tended service for meeting the customer demand. For example, the
total number of beds in a healthcare facility shows the service capacity
of the facility. Similarly, the square meter area utilised in a supermar-
ket shows the service capacity of the store. Thus, service capacity is
the highest possible amount of output that may be attained in a spe-
cific period of time.
M
Though, planning of service capacity is similar to the planning of

manufacturing capacity, there are certain major differences. In com-
parison to manufacturing capacity, service capacity is more time and
location dependent. Moreover, it is subjected to more volatile demand
N
fluctuations. Let us discuss these factors in detail:

Time: Service capacity cannot be inventoried and therefore, it is
not possible to store it for further use. Moreover, service capaci-
ty cannot be transferred from one customer to another. Thus, the
availability of capacity becomes necessary in order to produce a
service when required. For example, you cannot give an unoccu-
pied seat of previous flight to a passenger if the current flight is
full. Thus, in case you do not avail the service on the specific time,
it would perish immediately.
Location: The service capacity requires being located near the
customer. A hotel room available in city ‘A’ would not produce any
service to a customer living in city ‘B’. In manufacturing, produc-
tion may take place at some facility and then the goods may get
distributed to customers located at different places. However, this
is not possible in the case of services. A service cannot be differen-
tiated from facility responsible for providing it. Moreover, services
cannot be stored to be distributed later as they are normally pro-
duced and utilised at the same time. Thus, a service is produced

n o t e s
only when the capacity to deliver the service is distributed to the

customer.
Volatility of demand: The volatility of demand on a service deliv-
ery system is usually very high. This happens mainly because ser-
vices cannot be stored. In manufacturing, inventory of goods helps
an organisation to maintain a balance between demand and sup-
ply. However, this is not possible in the case of services. Services
cannot be saved, stored or resold. If unconsumed, they simply go
waste. Take an example of an empty seat in an airplane, or an un-
occupied hospital bed or hotel room or an hour without a patient
in the day of a physician; these all are lost opportunities for the
service providers.
Services also face the situation of unpredictable demand due to the

reason that customers interact directly with the production system.
S
Moreover, every customer often has different needs and requires dif-
ferent numbers of transactions. This not only generates variability in
the processing time needed for each customer, but also brings incon-
IM
sistency in the minimum capacity requirement.
Apart from these two reasons, the third major reason for volatility in
service demand is constant change in consumer behaviour. The be-
havioural pattern of consumers affects the demand for any service
to a great extent. For example, it is not easy to book a hotel room at
some hill station during summers as at that time the demand for hotel
M
rooms are higher due to summer vacation. However, you can easily
get rooms in winter or rainy season due to low or moderate demand.
Thus, an organisation, while planning service capacity must consider

these factors in detail.
N
6.4.1 CAPACITY UTILISATION AND SERVICE QUALITY
Service capacity planning considers a day-to-day relationship be-

tween service capacity utilisation and service quality. Capacity utilisa-
tion measures the extent to which the productive capacity of a service
is being used. In other words, it can be defined as the percentage of
total capacity that is actually being achieved in a specific period. Ca-
pacity utilisation can be calculated by using the given formula:
Capacity utilisation (expressed in %) = Actual level of output/maxi-

mum possible output × 100
A service organisation requires handling its capacity carefully so that

the optimum level of capacity utilisation is achieved at any given point
of time. When capacity utilisation exceeds a certain limit, it would
negatively affect service quality and customer complaints are bound
to happen. This happens because the organisation is serving more
customers than its capacity. The possible consequence could be that

n o t e s
some customers may remain unserved and thus, it would result in a

loss of business opportunity. Apart from this, served customers would
not be able to get full attention of employees and as there would be
long waiting time to serve each customer; the total quality of service
would be degraded. Excessive capacity utilisation in terms of human
resources and other equipment would result in poor quality services.
Service organisations should handle such situations carefully as those
may spread dissatisfaction among customers, which could ultimately
lead to erosion of the organisation’s customer base.
On the other hand, in the case of low capacity utilisation, the service
provider could give more attention to each and every customer and
therefore, could focus more on service quality. In such situations, cus-
tomers receive higher quality of services as they get minimum wait-
ing time and an opportunity to fully utilise the capacity of the facili-
S
ty. However, this situation leads to excess production capacity where
human resources as well as other equipment remain underutilised.
In such a scenario, the production cost per unit would be higher as
organisations usually have a fixed cost component. High cost and low
IM
revenue may lead the organisation to incur financial loss.
Thus, service organisations should focus on maintaining a balance be-

tween capacity utilisation and demand. Only this would lead to pro-
vide high quality services to customers at the maximum rate of profit.
However, there are certain exclusions. Many experts believe that low
M
capacity utilisation rates are appropriate when both the degree of un-
certainty and stakes are high in the business. For example, healthcare
emergency rooms and fire stations should aim for low utilisation due
to the high level of uncertainty and the life-or-death nature of their
N
service activities. Relatively predictable services, such as postal ser-

vices, restaurants, etc. may plan to operate at higher rate of capacity
utilisation.
Basically, service organisations, considering the nature of their busi-

ness, should focus on understanding demand patterns related to ser-
vices offered by the organisation in a specific time period. This could
help them in taking measures regarding how to utilise capacity (with
respect to demand) to reach at the optimum level and thereby deliver-
ing high quality services to its customers.
10. A service is produced only when the capacity to deliver the

service is distributed to the customer. (True/False)
11. _____________ measures the extent to which the productive
capacity of a service is being used.

n o t e s
Activity
Visit a restaurant in your vicinity. Observe how it focuses on achiev-

ing the optimum level of capacity utilisation at any given point of
time. Also, note when capacity utilisation exceeds or falls behind a
certain limit, how it affects the level of service quality provided by
the restaurant. Make a report based on your observation.
6.5 SUMMARY
Capacity refers to the ability of a production unit to produce some-
thing using the available resources within the given time period.
Capacity management is all about ensuring whether the available
capacity of a production facility is sufficient to meet the business
S
requirements effectively.
An organisation can determine the capacity requirements of a pro-
duction facility by converting its production schedule into stan-
IMdard hours.
Capacity planning refers to the process of determining the level of
capacity required to manufacture a specific product with a defined
quantity.
Capacity planning decisions of an organisation can be classified
into three different categories based on the time horizons. These
M
three types are:

Long-term capacity planning
Intermediate-term capacity planning
N
Short-term capacity planning

Long-term capacity planning is concerned with accommodating
major changes that affect the overall level of output in the long
run.
Intermediate-term capacity planning is also known as aggregate
planning. It is the process of planning the quantity and timing of
output over an intermediate time horizon (3 to 18 months).
Short-term capacity planning involves decisions with respect to
production schedules, workforce levels and overtime. Such type of
planning is done by organisations for a daily, weekly or quarterly
time frame.
The capacity focus concept is operationalised in a production facil-
ity through the ‘Plants within Plants (PWPs)’ system. Such organi-
sations focus on fairly limited set of production objectives.
Capacity flexibility refers to an ability of an organisation to rapidly
increase or decrease production level or revise production capa-
bility swiftly from one product to another.

n o t e s
Flexibility in production can be achieved through:

Flexible facility
Flexible processes
Flexible workers
Servicecapacity refers to a service system’s ability to deliver the
intended service for meeting the customer demand.
In comparison to manufacturing capacity, service capacity is more
time and location dependent. Moreover, it is subjected to more vol-
atile demand fluctuations.
Servicecapacity planning considers the day to day relationship
between service capacity utilisation and service quality.
Capacity utilisation measures the extent to which the productive
S
capacity of a service is being used.
A service organisation requires handling its capacity carefully so
IM
that the optimum level of capacity utilisation is achieved at any
given point of time.
When capacity utilisation exceeds a certain limit, it would nega-
tively affect service quality.
In the case of lower capacity utilisation, the service provider could
give more attention to each and every customer and therefore,
M
could focus more on service quality.
key words
Best operating level: The level of capacity for which the aver-
N
age unit cost is at a minimum.

Capacity utilisation: The ratio of the actual output to design
capacity.
Capacity: A facility’s maximum productive capability, usually
expressed as the volume of output for a defined time period.
Changeover time: The time taken in converting a line or ma-
chine from one batch to another.
Strategic capacity management: The process of managing
the overall capacity level of an organisation to best support the
long-term competitive strategy of the organisation.

1. Explain the concept of capacity management.
2. Discuss the importance of capacity planning.

n o t e s
3. Write a short note on the following:

(a) Long-term capacity planning
(b) Intermediate-term capacity planning
(c) Short-term capacity planning
4. Discuss the capacity focus and capacity flexibility concepts.
5. What is meant by service capacity planning? How does capacity
utilisation affect the service quality of a service organisation?
Elaborate on with the help of examples.
S
Capacity Management in Oper- 1. True
ations
IM
2. Capacity management
3. True
4. Standard hours
Capacity Planning 5. Demands
6. Time; capacity
M
7. d. None of these

8. Aggregate planning
9. Capacity flexibility
Planning Service Capacity 10. True
N
11. Capacity utilisation

1. Capacity management is all about ensuring whether the
available capacity of a production facility is sufficient to meet the
business requirements effectively. Refer to Section 6.2 Capacity
Management in Operations.
2. Capacity planning helps in determining the level of capacity
required in manufacturing a specific product with a defined
quantity. Refer to Section 6.3 Capacity Planning.
3. Long-term capacity planning is concerned with accommodating
major changes that affect the overall level of output in the long run.
Intermediate-term capacity planning is the process of planning
the quantity and timing of output over an intermediate time
horizon (3 to 18 months). Short-term capacity planning involves
decisions with respect to production schedules, workforce levels
and overtime. Refer to Section 6.3 Capacity Planning.

n o t e s
4. The capacity focus concept is operationalised in a production

facility through the ‘Plants within Plants (PWPs)’ system.
Capacity flexibility refers to an ability of an organisation to
rapidly increase or decrease the production level or revise
production capability swiftly from one product to another. Refer
to Section 6.3 Capacity Planning.
5. Service capacity planning considers a day-to-day relationship
between service capacity utilisation and service quality. Refer to
Section 6.4 Planning Service Capacity.
SUGGESTED READINGS
S
Heizer,
IM
J. & Render, B. (2001). Operations Management (1st ed.).
Kale,
E-REFERENCES
M
Capacity Planning - Meaning, Classification and its Goals.

(2017). Managementstudyguide.com. Retrieved 14 July 2017, from
http://www.managementstudyguide.com/capacity-planning.htm
Capacity Utilization and Effects on Product and Profit. (2017). Small-
N
business.chron.com. Retrieved 14 July 2017, from http://smallbusi-

ness.chron.com/capacity-utilization-effects-product-profit-67046.
html
Chapter 3. Assessing Community Needs and Resources | Section
11. Determining Service Utilization | Main Section | Community
Tool Box. (2017). Ctb.ku.edu. Retrieved 14 July 2017, from http://
ctb.ku.edu/en/table-of-contents/assessment/assessing-communi-
ty-needs-and-resources/determine-service-utilization/main
Match Supply and Demand in Service Industries. (2017). Har-
vard Business Review. Retrieved 14 July 2017, from https://hbr.
org/1976/11/match-supply-and-demand-in-service-industries
Operations Management – Capacity Planning And Control | Oxbridge
Notes the United Kingdom. (2017). Oxbridgenotes.co.uk. Retrieved
14 July 2017, from https://www.oxbridgenotes.co.uk/revision_
notes/management-university-of-exeter-operations-management/
samples/operations-management-capacity-planning-and-control

N
M
IM
S
C h a
7 p t e r
INTRODUCTION TO SUPPLY CHAIN STRATEGIES
CONTENTS
S
7.1 Introduction
7.2 The Evolution of Manufacturing and Supply Chain Strategies
IM
Activity
7.3 Production and Logistics Strategy
7.3.1 Lean Production
7.3.2 Agile Supply Chains
7.3.3 Mass Customisation
M

Activity
7.4 Taxonomy of Supply Chain Strategies
N
Activity
7.5 Critical Factors Considered in Supply Chain Planning
Activity
7.6 Operational and Strategic Issues in Global Logistics
Activity
7.7 Logistics Outsourcing Strategy (3PL and 4PL)
7.7.1 Types of Logistics Companies
Activity
7.8 Summary

n o t e s
SUPPLY CHAIN STRATEGIES FOLLOWED BY KELLOGG’S
Source: www.cnbc.com
S
Established in 1906 and headquartered in Battle Creek, Michi-
gan, United States; the Kellogg Company (also called Kellogg’s,
Kellogg, and Kellogg’s of Battle Creek) is a multinational food
IM
manufacturing company. Kellogg’s produces a large variety of ce-
real and convenience foods, including:
Cookies
Crackers
Toaster pastries
M
Cereal bars
Fruit-flavoured snacks
Frozen waffles
Vegetarian foods
N
The company owns some of the widely recognised brands, such

as Froot Loops, Apple Jacks, Corn Flakes, Frosted Flakes, Rice
Krispies, Special K, Cocoa Krispies, Keebler, Pringles, Pop-Tarts,
Kashi, Cheez-It, Eggo, Nutri-Grain, Morningstar Farms, and
many more. Kellogg’s work to fulfil its vision of: Nourishing fami-
lies so they can flourish and thrive.
Source: http://seltek.co

INTRODUCTION TO SUPPLY CHAIN STRATEGIES 199
n o t e s
As the world’s leading cereal manufacturer, Kellogg’s has been

serving its customers successfully throughout the world. Kel-
logg’s has multiple manufacturing plants, located in the United
Kingdom, Australia, Canada and Asia. Currently, Kellogg’s man-
ufactures its products in 19 countries and sells them in approxi-
mately 160 countries.
Kellogg’s follows extensive supply chain strategies that take care

of activities starting from product development to deliver the final
product to the customer. Comprehensive supply chain strategies
at Kellogg’s focus on the following decision-making areas:
Location of the facility: It is one of the major decisions that
affect the entire supply chain management process of any
organisation. In order to ensure that the product reaches to
S
the target customers in a fresh condition, Kellogg’s locates its
manufacturing facility near to suppliers, distribution chan-
nels and customers.
IM
Size and scale of production: The next important decision is
made with regard to size and scale of production and produc-
tion facilities. Due to big scale of production, Kellogg’s facil-
ities require adequate space for equipment and production
processes. Apart from this, large facilities also help in the fre-
quent delivery of incoming materials and outgoing finished
goods.
M
Storage of materials and finished goods: Kellogg’s supply

chain strategies ensure that the manufactured products do
not linger in storage for long time. The focus remains on the
immediate distribution of products to maintain quality and
N
freshness.
Selection of intermediaries: Kellogg’s relies heavily on a
large number of intermediaries like wholesalers, supermar-
kets, high street stores, etc. for the distribution of its products.
Thus, it needs to decide and select its intermediaries carefully
to ensure vast reach to end-consumers.
As Kellogg’s is involved in food items business, it is important for

the company to get the best available raw material and ensure
that the product is of high quality. Kellogg’s obtains its raw ma-
terials, such as wheat, corn, cocoa, rice and sugar from primary
suppliers around the world. Extreme care is required in storing
and transporting the products so that they could reach to their
destinations without being contaminated. To ensure the quali-
ty of products, Kellogg’s follows lean production system (also
known as Toyota production system or Just-In-Time production)
to streamline processes and eliminate waste. The company uses

n o t e s
Kellogg Planning System (KPS), a large-scale linear programme,

for its operations, production, inventory and distribution system.
KPS helps the company in not only optimising the production but
also in managing the inventory costs.
Apart from this, Kellogg’s uses Just-in-Time (JIT) approach to en-

sure adequate stocks are maintained to meet demands of raw ma-
terials and finished products. In addition, JIT helps Kellogg’s in
reducing costs by avoiding over-stock of materials. Therefore, JIT
helps the company in maintaining just enough stocks to meet re-
quirements. JIT requires right balance and coordination at each
section of the supply chain of the company.
S
IM
M
N

n o t e s
learning objectives

>> Describe the evolution of manufacturing and supply chain
strategies
>> Discuss production and supply chain strategy
>> Elaborate on the taxonomy of supply chain strategies
>> Explain the critical factors considered in supply chain
planning
>> Describe the operational and strategic issues in global
logistics
>> Discuss the logistics outsourcing strategy (3PL and 4PL)
S
7.1 INTRODUCTION
In the previous chapter, you studied the role of strategic capacity man-
IM
agement in operations. In this chapter, let us focus on supply chain
strategies that help in achieving operational objectives.
Supply chain management is all about managing the end-to-end flow

of products, services and information across various parties such as
manufacturers, suppliers, distributors and customers. The manage-
M
ment of the supply chain of an organisation largely affects its efficien-

cy of its responsiveness towards customer requirements. An organi-
sation requires an efficient supply chain strategy that creates a link
between its various functions and activities throughout a value chain.
N
A supply chain strategy is a long-term plan of a value chain to meet the

demands of customers at the lowest cost possible. An organisation’s
supply chain strategy targets at adding value to its existing products
and services to exceed customer expectations. A supply chain strate-
gy can be created by linking the business strategy and supply chain
processes of an organisation. The reason is that the business strategy
of an organisation focuses on meeting its customers’ requirements in
a timely manner, while the supply chain strategy targets at using the
best way to fulfil those needs.
A supply chain strategy varies across organisations on the basis of

the type of products offered by them for various segments of custom-
ers. However, the main objective of any supply chain strategy is to
decrease costs and improve the overall efficiency of the organisation.
This is possible only if a supply chain strategy is created by consider-
ing various factors such as customer requirements, product attributes
and market characteristics.
In this chapter, you will study about the evolution of manufacturing

and supply chain strategies. In addition, you will study about produc-

n o t e s
tion and supply chain strategy. The chapter will also focus on the tax-
onomy of supply chain strategies and the factors considered in supply
chain planning. Finally, you will study the operational and strategic
issues in global logistics, and the logistics outsourcing strategy (3PL
and 4PL).
THE EVOLUTION OF MANUFACTURING

7.2
AND SUPPLY CHAIN STRATEGIES
Manufacturing and supply chain strategies focus on a chain of activ-
ities required for the production and distribution of a product. In the
current scenario, to establish and maintain effective manufacturing
and supply chain systems, organisations need to consider various fac-
tors such as increased competition, globalisation, corporate social re-
S
sponsibility and scarcity of resources. For this purpose, organisations
should have reliable, flexible and cost-effective manufacturing and
supply chain strategies ready.
IM
In other words, manufacturing and supply chain strategies involve a
plan of activities, which are required to be performed for meeting cus-
tomers’ requirements by producing and delivering products on time
at the lowest cost possible. It concentrates on what should be done to
improve the production and supply chain network performance of an
organisation.
M
Manufacturing and supply chain strategies evolved with emphasis on

the organisations’ ability to offer better products and services than
that of their competitors. This was different as compared to the pre-
vious approach of producing and distributing more goods in the mar-
N
ket. Earlier, the manufacturing and supply chain strategy focused on

concepts such as low cost and rapid product development. However,
over a period of time, organisations started focusing on developing
new capabilities.
In the current scenario, the manufacturing and supply chain strategy

of an organisation targets at staying competitive in the market and
producing business profits. A manufacturing and supply chain strate-
gy is created depending on the pre-defined organisational objectives
and goals. Therefore, it is aligned with an organisation’s overall busi-
ness strategy. It concentrates on optimising different supply chain
activities such as procurement, manufacturing, storage, distribution
and sales. Today, organisations focus more on using techniques like
lean manufacturing, Just-in-Time, continuous improvement, etc. to
improve quality and lower costs.

n o t e s
1. Today, the sole aim of manufacturing and supply chain strategy

is to produce and distribute more goods in the market. (True/
False)
2. Which of the following techniques is used by an organisation
to improve quality and lower costs?
a. Lean manufacturing
b. Just-in-Time
c. Continuous improvement
d. All of these
S
Activity
Using the Internet, search for manufacturing and supply chain

strategies followed by a multinational organisation. Prepare a re-
IM
port based on your findings.
PRODUCTION AND LOGISTICS

7.3
STRATEGY
M
Production and logistics are two inter-linked areas that together en-
sure the success of any operations strategy. Today, customers expect
to get high quality products/services in rapid response times. This
stresses on building an efficient production and logistics strategy to
fulfil the demands of customers.
N
An efficient production and logistics strategy helps an organisation to

determine the levels of service at which costs are optimal. An organ-
isation develops its production and logistics strategy for its different
products or customers or markets. An organisation needs to review
certain aspects of its production and logistics function while develop-
ing its strategies, for example, assembling, warehousing, transporta-
tion, etc.
Generally, the production and logistics strategy should support an

organisation to provide the best level of products/services to its cus-
tomers. Industries around the world are moving towards increasing
interdependence and collaboration as a result of enhanced network-
ing. Thus, organisations are looking to integrate their production and
logistics strategies to not only enhance their operations but also con-
tinuously offer the best possible product or service to customers at
affordable costs, while maintaining high quality.

n o t e s
Broadly, the production and logistics strategy comprises the following

elements that deliver high value to the organisation:
Leverage: This is the balance that organisations need to maintain
between cost reduction and improvement of service levels.
Communication: It refers to the robustness of a two-way dialogue
between the organisation and its suppliers.
Efficiency: This relates to operational and process efficiencies of
the organisation.
Innovation: This refers to the efforts of the organisation to inno-
vate their products and services during daily operations.
Risk management: This relates to the identification of internal
and external risks while managing the supply chain, and steps
which the organisation takes to mitigate them.
S
Continuous improvement: High performing organisations look
at ways and techniques to continually improve their operations.
These may impact the organisation internally or may affect its ex-
IM
ternal stakeholders.
In this way, the abovementioned elements can help an organisation in

the execution of an effective production and logistics strategy.
7.3.1 LEAN PRODUCTION
M
Lean production is defined as a systematic method for waste minimi-

sation (Muda) within a manufacturing system. This technique is de-
rived from the Toyota Production System (TPS) and is based on the
elimination of waste, which will lead to better quality, reduced produc-
N
tion time and lower costs. Lean production uses certain tools, such as:
Single-Minute Exchange of Die (SMED)
Value Stream Mapping
5-S
Kanban (Pull system)

Poka-Yoke (Error-proofing)
Total Productive Maintenance (TPM)
Control Charts
Heijunka (Matching unpredictable demand by levelling quantity
and type of production output)
First time right
Visual control
Just-in-Time (JIT)

n o t e s
Lean production aims to provide the right things at the right place at
the right time in the right quantity to achieve an efficient work flow,
while minimising waste and retaining flexibility. Waste is considered
to be of three types – muda, mura and muri. Muda deals with the vari-
ation in output and in-operation wastes. The various types of muda
are:
Transport of products/items which are not required for immediate
processing
Excess inventory
Excess production
Defects which lead to a waste of resources
Mura defines how the work design is executed and work imbalances
are avoided. Muri occurs from mura, and it relates to the removal of
S
excess waste from the process.
7.3.2 AGILE SUPPLY CHAINS

IM
The concept of agility was given by Goldman et al. (1995), and it means
‘readiness to change’. Today, the agile supply chain strategy has
emerged as the most preferred strategy in any organisation, dealing
with supply chain problems. The strategy efficiently helps in manag-
ing inventory by eliminating the situations of excess inventory and
potential shortage. This is done by getting more accurate and up-to-
M
date demand forecasting. The agile supply chain strategy minimises

the reaction time that an organisation takes to respond to the changes
in the market demand.
N
From business perspective, the key aspect of having greater control on

the supply chain is to improve visibility on the movement of materials
within the supply chain. This can be done by increasing transparency
of transactions with suppliers and service providers. The increased
visibility of data is as important as the visibility of materials. This in-
creased visibility also aids in rational decision making. An efficient
management of data with suppliers helps to make the supply chain
more agile to respond to the demands of customers. Improved visibili-
ty of inventory helps the manufacturer to plan capacities better, lower
manpower costs and make the cash flow more efficient.
Agile manufacturing involves all aspects of an organisation including

its people, processes, structures, strategies and relationships. It refers
to the manufacturer’s ability to quickly adjust the level of production
and allocation of resources as per the variability in demand. In other
words, the agile supply chain strategy focuses on being more respon-
sive in a volatile market place, where strategies are completely de-
mand driven. Today, with the continuous change in consumers buying
pattern, the whole supply chain network also needs to be changed.
The agile supply chain strategy helps businesses in coping with such

n o t e s
changes. The agile supply chain framework is based on four major

constituents, which are:
1. Virtual integration: In this, information is shared among
concerned departments regarding real demand from market. As
the departments collect the information they make collaborative
planning regarding how to cater to the demand of that particular
market. Every department then responds as per their capability
and capacity to fulfil the demand. Such virtual integration results
in end-to-end visibility, depicting the possible bottlenecks and
other problems that may create hindrance in the supply chain
network.
2. Process alignment: In this, focus is laid on co-managing the
inventory to shape the consumers’ need or want. This results in
a synchronous supply chain.
S
3. Network creation: Every individual in the supply chain needs to
put their efforts to bring success to the chain. As the task is divided
among all individuals according to their core competencies, it
IMhelps in reducing the overall burden on one or few departments.
4. Market demand: Today’s supply chain is highly market sensitive.
Demand forecasting is performed to predict demand based on
daily Point of Sale (PoS). Daily feedback is necessary as markets
are highly volatile in nature and in order to accurately meet the
future demand, it is necessary to keep track of the day-to-day
M
movement in the market trends.
Agile supply chain solves problems that exist in today’s supply chain
management network. It is perceived as a solution to increase the re-
sponsiveness of a supply chain in the ever-changing market environ-
N
ment. Agile supply chain strategy not only anticipates fluctuations in

a volatile market demand pattern, but also facilitates suppliers with a
solution to manage their own data through self-service functionality.
7.3.3 MASS CUSTOMISATION
Stanley M. Davis, a noted author, coined the term mass customisation

in 1987 in his book, ‘Future Perfect’. Mass customisation is the ability
of the organisation to manufacture and design customised products at
efficiency associated with mass production. According to this concept,
individually designed products for each customer are produced, using
a high degree of agility and integration of processes. The mass custo-
misation strategy involves trade-offs between the design of product,
production process and supply chain. Examples of mass customisa-
tion include:
Levi’s offering customised jeans, which are altered as per the cus-
tomer’s demand.

n o t e s
Dell Computers offering customised computers, which are assem-

bled using components specified by the customer.
Several construction companies offering customised homes to
their customers based on their specifications.
Broadly, mass customisation strategies are of the following types:

Pure standardisation: The customer does not get involve before
taking the possession of the product.
Segmented standardisation: The manufacturer designs the prod-
uct for a cluster of buyers.
Customised standardisation: Products are made-to-order using
standard components.
Tailored customisation: Products are customised at the stage of
S
fabrication.
Pure customisation: Products are customised from the starting
point. There is however, a certain element of standardisation, as it
IM
may be viewed as prototyping for every product.
There are four approaches to mass customisation:

Collaborative: This approach focuses on conducting a dialogue
with customers, which enables them to articulate their require-
ments, and accordingly make customised products for them.
M
Adaptive: It offers a standard and customised product that is de-

signed in such a way so that customers can alter it themselves.
Cosmetic: In this approach, a standard product is presented in a
varied manner to different customers.
N
Transparent: It provides customers with unique goods or services

without informing them that these goods or services have been
customised for them.
The technologies which aid mass customisation include Comput-

er-aided Design (CAD), Computer Integrated Manufacturing (CIM)
and Flexible Manufacturing Systems (FMS).
The rapidly changing market dynamics require organisations to have

re-programmable and re-configurable production mechanisms which
can produce goods economically. Research studies over the years
have shown that modularity is the critical factor for achieving low-
cost mass customisation.
Mass customisation, from a supply chain perspective, involves collab-

orative efforts with suppliers, warehousing personnel, manufactur-
ers, distribution centre members and other participants of the supply
chain. Efficient supply chain management is an important necessity

n o t e s
for the implementation of the mass customisation strategy. The goal

of mass customisation is to deliver a product with great quality in the
fastest time frame and at lower costs.
3. Which of the following is not considered as a type of ‘waste’?

a. Muda
b. Mudi
c. Mura
d. Muri
4. _____________ is perceived as a solution to increase
the responsiveness of a supply chain in volatile market
S
environment.
5. The ability of the organisation to manufacture and design
customised products at an efficiency associated with mass
IM production is called ____________.
6. In ___________ approach to mass customisation, a standard
product is presented in a varied manner to different customers.
a. Collaborative
b. Adaptive
M
c. Cosmetic
d. Transparent
Activity
N
Using the Internet and other secondary sources, identify any three
retail organisations that implement the agile supply chain strategy
to deal with many problems that exist in today’s supply chain man-
agement network. Prepare a report on how the agile supply chain
strategy helps organisations in overcoming supply chain issues.
TAXONOMY OF SUPPLY CHAIN

7.4
STRATEGIES
The taxonomy of supply chain strategies provides a detailed theoreti-
cal framework for any strategy-related research in the field of supply
chain management. Any organisation while selecting the supply chain
strategy does a careful analysis of the demand/supply characteristics
of different products/markets served by the organisation. This forms
the basis for a taxonomy of appropriate supply chain strategies. Chris-
topher et al. has put forward taxonomy for selecting supply chain
strategies, shown in Figure 7.1:

n o t e s
Lean Leagile
Long lead time
Plan and execute Postponement
Lean
Agile
Short lead time Continuous
Quick response
replenishment
Predictable demand Unpredictable demand
Figure 7.1: Taxonomy for Selecting Supply Chain Strategies
The taxonomy uses both predictability of demand for products and re-
S
plenishment lead times. The explanations related to this combination
are given in Table 7.1:
TABLE 7.1: SUPPLY DEMAND CHARACTERISTICS AND RE-

IM
SULTING STRATEGIES
Supply Demand Characteristics Resulting Strategies
Short lead time + Predictable de- Lean, continuous replenishment
mand
Short lead time + Unpredictable Agile, quick response
demand
M
Long lead time + Predictable de- Lean, planning and execution

mand
Long lead time + Unpredictable Leagile production/logistics post-
demand ponement
N
The table suggests that there could be four generic supply chain
strategies. In cases when demand is predictable and replenishment
lead time is short then a continuous replenishment strategy is adopt-
ed. This is how companies like Procter & Gamble manage their sup-
ply chain for fulfilling demands at Walmart. Procter & Gamble takes
help of point-of-sale data to replenish products at individual stores of
Walmart.
Now, if there is unpredictable demand and long lead time, the ideal
solution could be to carry inventory in some generic form and assem-
ble/configure them as and when required (depending on when the
actual demand takes place). This is an example of the postponement
strategy. Hewlett Packard (HP) follows this strategy for the range of
its Deskjet printers. HP builds semi-finished products at its central
facility and then ships it to regional centres around the world, which
are run by third-party logistics service providers. At these centres, the
product finally gets configured and delivered to customers when actu-
al orders are received.

n o t e s
The third situation depicts long lead times with predictable demand.
In such situations there is an opportunity to use lean type of strate-
gies, where products could be made or sourced well ahead of demand
in the most efficient manner. Take an example of UK based retailer
Woolworths that sells a million plastic Christmas trees every year. The
store basically sources these products from China and for this it places
their order over six months ahead of the season. Woolworths does so
as based on the prior experience of demand for such trees at the time
of Christmas, the store sees no or little risk in following this strategy.
Let us now discuss the last scenario, when the demand is unpredict-
able and lead times are short. In such cases, agile solutions are re-
quired based on a rapid response. Zara is a good example of a retail
chain, following this strategy. Zara is operated by Inditex Group, a
Spanish fashion giant. Zara is known for developing a new product
S
and getting it into stores within just two weeks. It collects information
on a daily basis to know the tastes of consumers and creates new de-
signs and modifies existing ones. Accurate product information and
inventory management help Zara to manage and design thousands
IM
of garments within the available stock. If a certain style or fashion
becomes the new must-have on, Zara’s designers work swiftly on the
new style and bring it in store while the trend is still going strong.

M
7. In cases when demand is predictable and replenishment lead

time is short then a __________________ strategy is adopted.
8. In case of long-lead times with unpredictable demand there is
an opportunity to use lean type of strategies, where products
N
could be made or sourced well ahead of demand. (True/False)

9. When the demand is unpredictable and lead-times are short,
________strategy are required based on rapid response.
Activity
Using the Internet, find at least five organisations that apply a le-
agile production/logistics postponement strategy. Prepare a list of
such organisations. Give reasons why these organisations follow
the leagile production/logistics postponement strategy.
CRITICAL FACTORS CONSIDERED IN

7.5
SUPPLY CHAIN PLANNING
There are certain critical factors that could affect the supply chain
planning of any organisation to a great extent. These factors are

n o t e s
Uncertainty in External Environmental Factors
Information Technology
Supply Chain Relationships
Value Addition
Supply Chain Management (SCM) Performance
Business Management
Customer Satisfaction
Opportunities and Risk Identification
S
Figure 7.2: Critical Factors Considered in Supply Chain Planning
Let us study these factors in detail.

IM
Uncertainty in external environmental factors: This involves
uncertainties associated with external environmental factors. The
external environment of an organisation is divided into several
components, such as political, economic, socio-culture, technolog-
ical, market and supplier. An organisation does not have any direct
M
control over these external factors. Thus, if changes are favour-

able, they may support the supply chain planning of the organi-
sation. However, unfavourable conditions may negatively impact
overall supply chain planning.
Information technology: Today, technology and telecommunica-
N
tions enable all participants in the supply chain to interact with

each other freely and speedily. The use of IT enables manufac-
turers, retailers and customers to minimise lead time and reduce
paperwork and other unnecessary activities. Certain tools, such
as Electronic Data Interchange (EDI) and Enterprise Resource
Planning (ERP) are being increasingly applied to make the supply
chain more efficient. This includes two sub-factors, which are:
Communication: EDI is used in purchase orders, procure-
ment, order status queries and follow-up. Electronic Funds
Transfer (EFT) enables the transfer of funds between trading
partners. Local Area Network (LAN) or Wide Area Network
(WAN) is also used.
Planning tools: Some commonly used planning tools are Mate-
rials Requirement Planning (MRP), Manufacturing Resources
Planning (MRP II) and Enterprise Resource Planning (ERP).
Moreover, certain tools, such as Data Warehousing (DW), Ven-
dor Managed Inventory (VMI) and Customer Relationship
Management (CRM) are also used.

n o t e s
Supply chain relationships: The relationships between the par-

ticipants of a supply chain are of high importance. This leads to a
better level of understanding between the customers and the sup-
pliers. Developing partnerships with suppliers helps the company
to obtain higher levels of service from them. This also leads to bet-
ter information sharing between them.
Value addition: It can be defined as the steps in manufacturing
or service which are used to add value to the product or service
for the customer. The main aspects of value addition are flexibili-
ty, quality and improved production systems. Flexibility is needed
to respond quickly to changing customer demands and adapt to
changing market dynamics. Quality is the key parameter for the
acceptance of the product. Production systems focus on reducing
the activity time and making the processes more efficient.
Supply Chain Management (SCM) performance: This is the lev-
S
el of operational excellence desired to achieve superior customer
experience. The measurability and consistency are important in-
dicators of SCM performance. The specific parameters for mea-
IMsuring the performance include throughput efficiency, inventory
levels, cost and level of service. Effective administration includes
improvement in logistics, better knowledge about the supplier
markets, enhanced level of supplier performance and low cost ma-
terial sourcing.
Business management: This comprises planning, organising,
monitoring and controlling of all factors that influence the achieve-
M
ment of the business goal. Rapid changes in demand, markets and

technology force organisations to improve their competitiveness.
Organisations need to focus on their process strategy, marketing
strategy, etc. They are expected to provide better quality products
N
at lower costs.
Customer satisfaction: The perception of the customer may vary
from one manufacturer to another. The customer may give more
value to timely delivery or cost. The manufacturers aim to deliver
the best product or service to the customer in order to achieve
maximum customer satisfaction.
Opportunities and risk identification: This helps manufacturers
to design or re-design the supply chain accordingly.
10. An organisation does not have any direct control over these
external factors. (True/False)
Activity
Take an example of an automobile company. Identify and list major

critical factors that have affected the supply chain planning of the
company to a great extent.

n o t e s
OPERATIONAL AND STRATEGIC ISSUES

7.6
IN GLOBAL LOGISTICS
Nowadays, global logistics has become complicated because of uncer-
tainties in an international economy. Several international, regional,
local, political and business issues affect global logistics and they also
affect the manufacturing and delivery competencies. Some of these
issues that affect the operations and strategy of global logistics are
Complex Taxation Laws
Different Quality Standards
S
Different Customer Expectations
Rapid Technological Changes

IM
Conflicts in Networking
Limitations in Infrastructure
Shortage of Talent
M
Figure 7.3: Operational and Strategic Issues in Global Logistics
Let us study these issues in detail.

N
Complex taxation laws: Logistics operations face differing laws

related to taxes and customs in various countries. Organisations
need to incorporate these variations in their planning.
Different quality standards: A product’s quality accepted in one
region may be rejected in another. This can be a challenge for or-
ganisations to constantly adapt its quality levels.
Different customer expectations: The expectations of customers
are increasing continually. They want more quality products and
services at less cost. The huge expectation can sometimes be a
challenge for organisations to meet.
Rapid technological changes: The increasing number of business-
es incorporates the use of technology in their operations. Such
latest technologies create newer challenges, for instance, time to
adapt, as well as ease of working.
Conflicts in networking: Previously, organisations used to oper-
ate in their independent spheres. Now, there is increased inter-
dependence between suppliers and customers which has created

n o t e s
a network of business stakeholders who aim at integrating their

services. Sometimes, this networking can create conflicts between
them.
Limitations in infrastructure: These include limited transporta-
tion options, poor roads, improper train schedules, etc. Such is-
sues in one part of the supply chain can affect the entire logistics
flow resulting in delivery delays.
Shortage of talent: Untrained personnel, shortage of skilled man-
power and low competence in supply chain management can af-
fect production, quality and delivery schedules.
Nowadays, there are many institutes around the world, which have
started courses in supply chain management. Besides, organisations
are also analysing potential delays in terms of how it may affect pro-
S
duction or promotion of goods and services. Many logistics organisa-
tions provide suppliers with Internet-based tools that help them in:
production status updates
IM
purchase order acceptance
quality check results
shipment routing
bar coding of cartons and products
radio frequency identification (RFID) tags
M
Security concerns related to the supply chain are increasing in to-

day’s volatile political environment. The Customs-Trade Partnership
Against Terrorism (CTPAT) is an initiative, which is aimed at increas-
ing the security of goods entering the United States.
N
There is also high variability in international logistics. This has an im-

pact on inventory and its movement. Global logistics leaders aim to
minimise lead times for the delivery of products. They aim to enhance
the performance of suppliers and service providers in the long term,
in terms of timeliness, cycle times, accuracy and quality. The overall
aim is to reduce risk in the supply chain through suitable access to
necessary information. There is an easy access to information related
to:
cost
carrier rates
carrier capacities
contract commitments
shipment details
movement schedules
in-transit status

n o t e s
performance measures
dynamic, real-time scheduling
11. Which of the following is an operational and strategic issue in

global logistics?
a. Complex taxation laws
b. Different quality standards
c. Different customer expectations
d. All of these
S
Activity
Using the Internet, find information on the operational and strate-

gic issues in an Indian logistics organisation, operating in the Unit-
IM
ed States. Prepare a report based on your findings.
LOGISTICS OUTSOURCING STRATEGY

7.7
(3PL AND 4PL)
M
In supply chain management, the trend of subcontracting with exter-

nal parties has become a common practice. These parties are called
‘third-party logistics providers’ or ‘3PL’. 3PL is the practice of hiring
an external agency for performing all or a part of the product distribu-
tion and purchase management functions of an organisation. A 3PL
N
can either be an integrated association or a standalone operator. A

standalone operator is called a wholesaler that extends only one ser-
vice type in which it excels. Generally, these operators provide ser-
vices in areas such as transportation, warehousing, inventory man-
agement and packaging. On the other hand, an integrator is a 3PL
provider who provides all logistics solutions and supply chain services
to its client organisations.
In the 1990s, organisations started focusing on supply chain manage-

ment and realised that logistics is a core process in supply chain in
an organisation. This is when the concept of 3PL providers came into
existence. The main reasons why 3PL providers were adopted so rap-
idly are reduced lead times and logistics costs. In India, a research
on supply chain management practices has shown that outsourcing
logistics activities is becoming popular in Indian organisations with a
growth in the number of third-party logistics providers over the last
many years. Using 3PL services is a strategic decision that is based on
its impact on the performance of a business. The following are some
of the criteria for the assessment of 3PL providers:

n o t e s
Impact on logistics performance

Impact on customer satisfaction
Improvement in inventory turnover rates
Improvement in delivery times
Decrease in capital investment in facilities and equipment
Reduction in labour cost
Increase in productivity
A new trend has begun in an organisation’s supply chain and logis-

tics system with the introduction of information technology in supply
chain management. IT organisations provide logistics solutions by in-
tegrating their logistics systems with information technology. These
organisations are called ‘fourth party logistics providers’ or ‘4PL’. The
S
term ‘4PL’ was coined in 1996 by Anderson Consulting Company (now
Accenture). It is a comparatively a new concept in supply chain man-
agement. As per Accenture, A 4PL is an integrator that assembles the
IM
resources, capabilities and technology of its own organisation and other
organisations to design, build and run comprehensive supply chain solu-
tions.
4PL is defined as an arrangement in which an organisation outsources

its logistics activities to more than two 3PLs and takes the assistance of
an IT organisation in coordinating the activities of these 3PLs. These
M
4PL providers comprise strategic supply chain consultants who help

organisations in transportation, logistics, demand and supply chains
integration and warehouse management. A 4PL organisation is the
one that meets the following conditions:
N
Collaborates between more than two logistics service providers on

a resource sharing basis
Covers the complete supply chain of the client organisation
Provides IT-based solutions and not on the basis of asset in the
case of 3PLs
4PLs recognise the potential of supply chain optimisation of client or-

ganisations and provide required solutions like supply chain software
or IT systems to these organisations. Some of the benefits of 4PL pro-
viders are:
Supply chain system integration
Access to a broader base of potential suppliers
Reduced order cycle times
Automation and standardisation of order placement
Reduced procurement costs

n o t e s
7.7.1 TYPES OF LOGISTICS COMPANIES
3PL services include transportation, inventory management, pack-

aging, warehousing and freight forwarding. Courier companies and
freight forwarders are the examples of 3PL companies. Some of the
types of 3PL companies include:
Standard 3PL provider: This type of company picks, packs, ware-
houses and distributes the product for its customer.
Service developer: It provides services such as tracking,
cross-docking, unique security and other advanced services to the
customer.
Customer adaptor: It takes over the entire logistics function of the
company.
Customer developer: This type of company integrates itself with
S
the customer and performs extensive tasks for them.
Various forms of 3PL are as follows:

Transportation-based
IM
3PL: Examples include Schneider Logis-
tics, FedEx Logistics, UPS Logistics, etc.
Warehouse-based 3PL: Examples include DSC Logistics, Cater-
pillar Logistics, USCO, etc.
Forwarder-based 3PL: Examples include AEI, Circle, Fritz, etc.
Shipper-based 3PL: Examples include AFS Logistics, Worldwide
M
Express, GlobalTranz, etc.

Financial-based 3PL: Examples include GE Information Services,
FleetBoston, etc.
N
Information-based 3PL: Examples include Nistevo, uShip, Trans-

place, etc.
Although the businesses of different sectors may vary, it is import-

ant to consider the use of 3PL or 4PL service providers based on the
needs of the organisation.
12. _________ is the practice of hiring an external agency for

performing all or a part of the product distribution and
purchase management functions of an organisation.
13. An integrator is a 3PL provider who provides all logistics
solutions and supply chain services to its client organisations.
(True/False)
14. ____________ is defined as an arrangement in which an
organisation outsources its logistics activities to more than
two 3PLs and takes the assistance of an IT organisation in
coordinating the activities of these 3PLs.

n o t e s
Activity
Find information on how third-party logistics is emerging as a driv-

er of e-commerce growth. Write a short note on it.
7.8 SUMMARY
Manufacturing and supply chain strategies are evolving by focus-
ing more on using techniques like lean manufacturing, Just-In-
Time, continuous improvement, etc. to improve quality and lower
costs. Earlier, the sole focus of these strategies was to improve pro-
duction and distribute more products in the market.
Production and logistics are two inter-linked areas that together
ensure the success of any operations strategy.
S
Generally, the production and logistics strategy should support an
organisation to provide the best level of products/services to its
customers.
IM
Lean production is defined as a systematic method for waste min-
imisation (Muda) within a manufacturing system.
The agile supply chain strategy minimises the reaction time that
an organisation takes to respond to the changes in the market de-
mand.
M
Mass customisation is the ability of the organisation to manufac-

ture and design customised products at an efficiency associated
with mass production.
The taxonomy of supply chain strategies provides a detailed theo-
N
retical framework for any strategy-related research in the field of

supply chain management.
The taxonomy uses both predictability of demand for products
and replenishment lead times.
In cases when demand is predictable and replenishment lead time
is short then a continuous replenishment strategy is adopted.
If there is unpredictable demand and long-lead time, the ideal
solution could be to carry inventory in some generic form and as-
semble/configure them as and when required (depending on when
the actual demand takes place).
If there is long-lead time with predictable demand, there is an op-
portunity to use lean type of strategies, where products could be
made or sourced well ahead of demand in the most efficient man-
ner.
If the demand is unpredictable, but lead-times are short, agile
solutions are required based on rapid response.

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There are certain critical factors that could affect the supply chain
planning of any organisation to a great extent. These factors are:
Uncertainty in external environmental factors
Information technology
Supply chain relationships
Value addition
Supply Chain Management (SCM) performance
Business management
Customer satisfaction
Opportunities and risk identification
Issues that affect the operations and strategy of global logistics are:
S
Complex taxation laws
Different quality standards
IM
Different customer expectations
Rapid technological changes
Conflicts in networking
Limitations in infrastructure
Shortage of talent
M
3PL is the practice of hiring an external agency for performing all

or a part of the product distribution and purchase management
functions of an organisation.
N
A 4PL is an integrator that assembles resources, capabilities and

technology of its own organisation and other organisations to de-
sign, build and run comprehensive supply chain solutions.
key words
Continuous improvement: A progressing effort to improve pro-

cesses, products and services of an organisation
Freight forwarding: The shipment and coordination of goods
from one location to another by single or multiple carriers
through rail, road, air, etc.
Just-in-Time (JIT): An inventory management technique that
attempts to improve a business’ return on investment by reduc-
ing in-process inventory and associated carrying costs
Lead time: The time lag between recognition of the need to
place an order and the receipt of the goods ordered
Warehousing: The activity of storing goods before being sold or
sent to shops

n o t e s

1. Write a short note on the evolution of manufacturing and supply
chain strategies.
2. Discuss the concept of lean production and agile supply chain.
3. Write a short note on the taxonomy of supply chain strategies
4. Discuss critical factors, which are considered at the time of
supply chain planning.
5. What are the major operational and strategic issues in global
logistics?
6. Write a short note on the logistics outsourcing strategy involving
3 PL and 4 PL.
S
IM

The Evolution of Manufacturing 1. False
and Supply Chain Strategies
2. All of these
M
Production and Logistics Strat- 3. b. Mudi

egy
4. Agile supply chain
5. Mass customisation
N
6. c. Cosmetic
Taxonomy of Supply Chain 7. Continuous replenishment
Strategies
8. False
9. Agile
Critical Factors Considered in 10. True
Supply Chain Planning
Operational and Strategic Issues 11. d. All of these
in Global Logistics
Logistics Outsourcing Strategy 12. 3PL
(3 PL and 4 PL)
13. True
14. 4PL

1. Manufacturing and supply chain strategies are evolving by
focusing more on using techniques like lean manufacturing,
Just-In-Time, continuous improvement, etc. to improve quality

n o t e s
and lower costs. Earlier, the sole focus of these strategies was to
improve production and distribute more products in the market.
Refer to Section 7.2 The Evolution of Manufacturing and
Supply Chain Strategies.
2. Lean production is defined as a systematic method for waste
minimisation (Muda) within a manufacturing system. Agile supply
chain strategy minimises the reaction time that an organisation
takes to respond to the changes in the market demand. Refer to
Section 7.3 Production and Logistics Strategy.
3. The taxonomy of supply chain strategies provides a detailed
theoretical framework for any strategy-related research in the
field of supply chain management. Refer to Section 7.4 Taxonomy
of Supply Chain Strategies.
4. The critical factors that could affect the supply chain planning of
S
any organisation include uncertainty in external environmental
factors, information technology, supply chain relationships,
value addition, supply chain management (SCM) performance,
IM
etc. Refer to Section 7.5 Critical Factors Considered in Supply
Chain Planning.
5. Complex taxation laws, different quality standards and
customer expectations, rapid technological changes, conflicts
in networking, etc. are some major operational and strategic
issues in global logistics. Refer to Section 7.6 Operational and
M
Strategic Issues in Global Logistics.

6. 3PL is the practice of hiring an external agency for performing all
or a part of the product distribution and purchase management
functions of an organisation. A 4PL is an integrator that
N
assembles the resources, capabilities and technology of its own

organisation and other organisations to design, build and run
comprehensive supply chain solutions. Refer to Section 7.7
Logistics Outsourcing Strategy (3 PL and 4 PL).
SUGGESTED READINGS
Kale,

n o t e s
E-REFERENCES
Introduction to Lean Manufacturing. (2017). Leanproduction.com.
Retrieved 26 July 2017, from http://www.leanproduction.com/
Logistics Woes Disappear With 3PL for Ecommerce. (2017). The
Balance. Retrieved 26 July 2017, from https://www.thebalance.
com/3pl-ecommerce-logistics-1141740
Manufacturing Strategy for the Extended Supply Chain. (2017). Sup-
plychainbrain.com. Retrieved 26 July 2017, from http://www.
supplychainbrain.com/content/research-analysis/gartner/sin-
gle-article-page/article/manufacturing-strategy-for-the-extend-
ed-supply-chain/
Slade, S. (2017). 6 Strategies for Better Supply Chain Management
in the Current Economy.Blogs.oracle.com. Retrieved 26 July 2017,
S
from https://blogs.oracle.com/scm/5-strategies-for-better-sup-
ply-chain-management-in-the-current-economy
The Agile Supply Chain Management: What is it and why should
IMyou care!. (2017). Medium. Retrieved 26 July 2017, from https://me-
dium.com/supply-chain-hubspot/the-agile-supply-chain-manage-
ment-what-is-it-and-why-should-you-care-966ad9829d19
Third Party Logistics (3PL) and Fourth Party Logistics (4PL) -
Cquential. (2017). Cquential. Retrieved 26 July 2017, from http://
www.cquential.co.za/industries/3pl-4pl/
M
What is lean production? - Definition from WhatIs.com. (2017). Search-

ManufacturingERP. Retrieved 26 July 2017, from http://search-
manufacturingerp.techtarget.com/definition/lean-production
N

C h a
8 p t e r
SUPPLY CHAIN RESTRUCTURING
CONTENTS
S
8.1 Introduction
8.2 Supply Chain Mapping
IM
Activity
8.3 Supply Chain Process Restructuring
Activity
8.4 Postponing the Point of Differentiation
M
8.4.1 Postponement for Reducing Transportation Cost

8.4.2 Advantages and Disadvantages of Postponing the Point of Differentiation
Activity
N
8.5 Re-engineering Improvement in SCM

Activity
8.6 Summary

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POSTPONEMENT STRATEGY FOLLOWED BY

HEWLETT PACKARD (HP)
S
Source: http://profit.ndtv.com
Hewlett Packard (HP) is a multinational company that provides

IM
IT hardware and software solutions along with IT and Informa-
tion Technology Enabled Services (ITES) to individuals and big
and small businesses. Headquartered at Palo Alto, California,
USA, the company has global presence including India. HP was
founded in 1939 by Bill Hewlett and Dave Packard. It employs
more than 10,000 individuals worldwide. The major competitors
M
of HP are CSC, Dell, Gateway and HTC Corp.
In the late 1980s, the company started facing a dual problem.

Firstly, its inventory was mounting and billions of dollars were
blocked in the inventory. Secondly, customers were becoming
N
increasingly dissatisfied with the order fulfilment process of HP.

The company was looking for a possible solution to address these
problems.
At that time, the products of HP were manufactured in its Vancou-

ver factory, Washington, US and were sold in North America and
Europe. Each European country had its own set of specifications
regarding the hardware components such as voltage, plug size,
etc. Due to these specifications, it was required that each product
must be customised for each European country separately.
Initially, the company followed the strategy to differentiate prod-

ucts for each market segment according to specific requirements,
such as products that require 110 volts supply or products that
require 220 volts supply within its Vancouver factory. The dif-
ferentiation was decided before the manufacturing process had
started. HP carefully thought about this practice and resolved to
postpone this differentiation at later stage in the supply chain.
This was done to reduce inventory and increase customer service

SUPPLY CHAIN RESTRUCTURING 225
n o t e s
by improving the order fulfilment process. HP developed a new

design of universal power supply that was built into the products
and could work in all the countries.
Due to this, HP was able to shift its differentiation at time, it re-

ceived customer order. HP also benefited because of this as the
products were not made for any specific country and in case of de-
mand and supply imbalances, the products could be easily trans-
shipped from one country to another. This postponement strategy
is a part of a bigger strategy known as supply chain restructuring.
S
IM
M
N

n o t e s
learning objectives

>> Explain the concept of supply chain mapping
>> Describe the concept of supply chain process restructuring
>> State the importance of postponing the point of differentia-
tion
>> Discuss the role of postponement strategy in reducing trans-
portation cost
>> Explain how re-engineering can lead to improvement in
supply chain management
S
8.1 INTRODUCTION
In the previous chapter, you studied supply chain strategies, which
are long-term plans of a value chain to meet the demands of custom-
IM
ers at the lowest cost possible. Supply chain activities start from the
very point when the manufacturer acquires raw materials and ends
when the products are bought by the end customers.
During this entire time, it is required that there is perfect co-ordina-

tion and flow of information among supply chain partners. It is im-
portant that any gaps or imbalances in the supply chain must be de-
M
tected as early as possible. It is the duty of the supply chain managers

to identify any gaps and resolve the same. For this purpose, supply
chain managers usually resort to two techniques:
1. Supply chain integration: Supply chain integration means
N
coordination, interaction and information flow linkage within

a supply chain. Without a smooth and uninterrupted flow of
information, the integration of supply chain would be ineffective.
Weak integration may lead to ineffective processes, which may
ultimately disrupt the supply chain network of an organisation.
Supply chain optimisation, on the other hand, refers to reaching
the optimal performance level of the manufacturing and
distribution supply chain of an organisation. These two concepts
help in improving the supply chain performance and reducing
costs. However, today the organisations are under tremendous
pressure to relentlessly improve their supply chain performance
to sustain their competitive advantage. To facilitate this,
organisations now use supply chain restructuring.
2. Supply chain optimisation: Supply chain restructuring is a
methodology that involves activities which help in significantly
changing and restructuring the supply chain processes and
architecture. It may involve closer integration between the
marketing process and supply chain process, process redesigning,

n o t e s
redesigning the network structures and offering more value to

the customers. Supply chain restructuring is accomplished by
three major strategies:
Postponing the point of differentiation
Altering the shape of the value addition curve
Advancing the customer ordering point
The details of these strategies will be discussed in the chapter.
In this chapter, you will study the concepts of supply chain mapping
and supply chain process restructuring in detail. Next, it will explain
the importance of postponing the point of differentiation. Lastly, it will
discuss the role of re-engineering improvement in supply chain man-
agement.
S
8.2 SUPPLY CHAIN MAPPING
Supply chain mapping is a method of identifying existing supply chain
IM
processes. This can be done on the basis of three dimensions:
Shape of the value-addition curve
Point of differentiation
Customer (entry point) in a supply chain
M
These dimensions are shown in Figure 8.1:
Order Placed by
Customer
N
Point of Differentiation
Cost
Shape of value addition curve
Time
Figure 8.1: Three Dimensions of Supply Chain Processes
Restructuring the supply chain process involves altering the supply

chain in at least one of these three dimensions. It may also involve
altering more than one of these dimensions or altering all the three.

n o t e s
Let us now discuss each dimension separately and see what kind of
restructuring can be undertaken in each of these dimensions.
1. Value-addition curve: A typical supply chain begins with raw
material and information, which are transformed into finished
goods and finally delivered to customers. This transformation
comprises a number of activities and each activity incurs cost and
time. Moreover, value addition for each activity also takes place.
Here, it has been assumed that all non-value adding activities
have been removed by an organisation during the supply chain
optimisation process. Refer Figure 8.1, the time is shown on the
x-axis while the total cost (cumulative) in the supply chain is
shown on the y-axis.
To map the value-addition curve, a reverse route (backward)
from the point where the value is delivered to the end customer
S
is taken and all activities that were performed to make the end-
product and service available are traced back. All these activities
are mapped in two dimensions:
IM Time
Cost
That means the value addition curve mainly captures the way
cost is added over a period of time in supply chain processes.
For example, a bus manufacturer receives engines (an important
component for making the bus) from an engine supplier; the
M
received engines have to wait till the machining operation (and

engine assembly) is scheduled in the machine shop (production
area). The whole production process is divided into various
stages:
N
a. First, machined castings are made which then go to the Work-

in-Progress (WIP) store.
b. This WIP inventory is then taken to the engine assembly
stage. At this stage, the engine is mounted over the chassis in
the bus assembly line.
c. After this, certain other activities, such as fitting and paint
are completed and the assembled bus is ready for dispatch to
the dealer.
d. After completing a particular number of buses, they are
transported to a dealer.
The bus remains in the inventory or showroom of the dealer until
a customer buys it. It means that the material in different forms
(raw/WIP/finished goods) waits at various stages. If all these
operations are added, you will get a curve (as shown in Figure 8.1
also), since costs are also getting added with every subsequent
activity in the supply chain process, y-axis is also showing an
increase with time.

n o t e s
2. Point of differentiation: Different organisations offer different

products to consumers. However, an organisation may choose
to differentiate a particular product to offer more variety to
consumers. The concept of point of differentiation (second
dimension) is valid only for organisations that offer product
differentiation.
Products are manufactured in a supply chain comprising
multiple stages. As the product progresses through a supply
chain, it assumes an identity that is closer to the end product. The
point of differentiation refers to the stage at which the product is
modified or differentiated and becomes a specific variant of the
end-product. For example, a toothpaste manufacturer offers one
variety of toothpaste in varying pack sizes (such as 50 grams, 100
grams, 200 grams, etc.). In this case, the point of differentiation
is the packaging stage.
S
Similarly, a garment manufacturer produces different styles of
garment using the same material (fabric). Here, differentiation
may occur at the stitching stage. An automobile manufacturer
IM
may create differentiation based on colours and models of
automobiles. Here, differentiation may take place at the painting
and designing stage. All the aforementioned examples reflect
one point of differentiation that occurs during a specific stage.
However, organisations can introduce differentiation in products
at various stages also. For example, a pizza manufacturer may
M
differentiate its pizzas based on the size and type of crust. It may
further differentiate each pizza based on the variety of toppings
used. Thus, you can say that a product can have more than one
point of differentiation.
N
However, in practice, organisations focus on one main point of

differentiation, which is done during the demand forecasting
level. Demand forecasting is a systematic process that involves
anticipating the demand for a product/service of an organisation
in future under a set of uncontrollable and competitive forces.
Demand forecasting at the aggregate level is relatively simple as
in this aggregate of individual demands (of all the consumers of
a product) is calculated (over a period of time at a specific price,
while other factors are constant). However, demand forecasting
at the variant level is quite difficult as in this individual demand
is calculated based on quantity demanded by an individual for
a product at a particular price and within the specific period
of time. For example, an automobile manufacturer may easily
forecast the demand for the total number of cars for its next
financial period with a great degree of certainty. However, the
automobile manufacturer would face difficulty if he wants
to predict the demand for a particular car having a particular
colour. In addition, as the variation increases, the chances of

n o t e s
error in forecasting also increase. The point of differentiation

forces the organisation to forecast demand at the variant level.
The probability of forecasting errors is higher for a longer time
period. Therefore, if the point of differentiation occurs early in
a supply chain, the organisation will have to forecast demand at
the variant level for a longer horizon.
3. Customer (entry point) in the supply chain: The dotted line in
Figure 8.1 shows the time or point (see that this line is parallel
to y-axis) at which a customer places an order. It is basically the
customers’ entry point in a supply chain. In other words, you can
say that the customers’ entry point in the supply chain is at the
end of the value addition curve and coincides with delivery time
of the product.
In some industries where customers give some lead time to
S
organisations to deliver the product, the customer’s entry point
is ahead of the delivery time. This is similar to the Configure to
Order (CTO) supply chain situation. The customers’ entry point
captures the order to delivery lead time. The importance of this
IM
dimension lies in the fact that all previous activities were carried
out on the basis of forecasts, whereas after the order placement by
the customer, all activities are done based on the order. However,
how perfect a forecast may be, there is a scope of errors in it. So
a lot of certainty comes to the entire operations if most activities
are carried out based on the real order rather than forecast.
M
1. Supply chain restructuring is a method that captures the

existing supply chain processes. (True/False)
N
2. During the value-addition mapping, activities are mapped in

two dimensions which include ________ and ________.
3. The probability of forecasting errors is higher for a longer
time period.(True/False)
4. Demand forecasting at the ________level is quite difficult
as in this individual demand is calculated for a product at a
particular price and within the specific period of time.
5. Usually, a customer entry point falls at the beginning of the
value-addition curve. (True/False)
Activity
Using the Internet, find information on organisations using Config-

ure to Order (CTO) model in India. Write a short note on it.

n o t e s
SUPPLY CHAIN PROCESS

8.3
RESTRUCTURING
Whenever the best supply chain practices, such as supply chain opti-
misation and integration, fail to achieve the desired changes, supply
chain managers may require resorting to supply chain restructuring.
Supply chain restructuring is all about integrating product and pro-
cess engineering with supply chain functions. Additionally, it may also
involve integrating supply chain functions with marketing and other
business functions. Supply chain restructuring also involves taking
into consideration, the existing supply chain processes and architec-
ture. In addition, it involves introducing innovative concepts, such
as product redesign, process redesign and network redesign, in the
supply chain to improve customer service. Supply chain process re-
structuring involves making changes in one or more dimensions of the
S
supply chain by adopting any of the following three approaches:
1. Postpone the point of differentiation: According to this
approach, the point of differentiation should be close enough to
IM
the end of the value curve. It means that all changes that are
made to introduce differentiation in a product should be made
near the customers at the delivery time. It is important as this
may help in carrying out majority of activities at the aggregate
level instead of the variant level. For example, paint companies
produce paints of different varieties in different colours. They
M
usually postpone the point of differentiation till the far end of

the value addition curve. For example, Asian Paints offers four
types of emulsion brands. All emulsions comprise a base and a
stainer. The stainer is the element which when added to the base,
produces an emulsion of the desired colour. Paints comprise 99
N
percent of the base and 1 per cent of stainers. The base for all
emulsions remains same whereas the stainer is manufactured in
various colours. Stainers are available in about 150-250 shades.
The process of mixing the base with the stainer is called tinting
operation. Now, Asian Paints has shifted its tinting operation
at the retail level. It means that the retailer produces emulsion
having a particular colour in tinting machines (paint mixing
machines) only after getting an order from a customer. By doing
this, Asian paints is not only changing its Made to Stock (MTS)
model to Configure to Order (CTO) model, but also saving billions
by reducing the inventory level at the variant level.
2. Alteration in the shape of the value-addition curve: Most cost
addition in products should be shifted to the end of the supply
chain. This helps in decreasing the level of inventory. Shifting
majority of cost addition towards the end of the supply chain
is important because if any unpredictable changes occur, the
organisation can incorporate those changes with minimum cost.

n o t e s
3. Advancement in the customer ordering point: It involves shifting

the customer ordering point or customer entry point near to the
start of the value-addition curve. This helps the organisation to
move from the MTS model to the CTO model of the supply chain.
The advantage of the CTO model is that most activities can be
done against an order. When activities are performed on the
basis of order, the level of forecasting reduces. In a supply chain
based on the CTO model, the point of differentiation occurs after
receiving the customer order. Therefore, in such a scenario,
there is no requirement of preparing the variant-level forecasts.
At this stage, it is important to differentiate between supply chain
restructuring and supply chain integration/optimisation. This
difference is explained in Figure 8.2, which shows the impact of
supply chain restructuring and supply chain optimisation on the
shape of value-addition curve:
S
Order Placed by
IM Customer
Point of Differentiation
Cost
M
New point of Differentiation
Time
N
Figure 8.2: Impact of Supply Chain Restructuring and Supply Chain

Optimisation on the Shape of Value-Addition Curve
In Figure 8.2, supply chain integration and optimisation lower the val-
ue-addition curve, which means that there is overall reduction in cost
and time involved in the supply chain. Additionally, there is also an
absolute shift in the point of differentiation; however, the relative po-
sition of the point of differentiation does not change. Please note that
supply chain integration and optimisation only lower the value-addi-
tion curve; they do not affect its shape. On the contrary, supply chain
restructuring may have one or more of the following impacts:
Affecting the shape of the value-addition curve
Shifting customer order (entry) point
Shifting the point of differentiation
These changes may be reflected in terms of changing product design

or product service bundle offered to customers. Supply chain restruc-
turing involves making major changes in the supply chain such as

n o t e s
moving from the MTS model to the CTO model of the supply chain.
All these changes lead to the increased efficiency of the supply chain
along with reduced costs for an organisation.
6. Supply chain restructuring involves taking into consideration

existing supply chain processes and architecture. (True/False)
7. List the three approaches used for supply chain restructuring.
8. An organisation can move from the MTS model to CTO model
of the supply chain by _________.
9. In the case of supply chain integration and optimisation, the
value-addition curve is lowered and there is a relative shift in
the point of differentiation. However, the absolute position of
S
the point of differentiation does not change. (True/False)
IM
Activity
Prepare a report on any two Indian organisations that have re-

cently restructured their supply chains. Include in your report the
problems faced by these organisations and the possible solutions
implemented by them.
M
POSTPONING THE POINT OF

8.4
DIFFERENTIATION
N
As discussed above, postponing the point of differentiation involves

shifting the point of differentiation towards the end of the value-addi-
tion curve. This can be achieved in reality by deferring the operational
process (differentiation process) to a later stage in the supply chain.
A differentiation process is an activity that results in producing dif-
ferentiated products using the base products. For example, suppose
an organisation manufactures potato chips in various flavours. The
process to produce chips in different flavours remains the same till the
flavouring agents and spices are added to produce chips. In this case,
the usual process of chips manufacturing includes the following steps:
1. Collecting and cleaning the required quantity of potatoes
2. Inspecting and making temperature checks
3. Peeling the skin and cutting the potatoes
4. Washing the starch
5. Frying the chips
6. Adding additives (spices and flavouring mixtures)
7. Packaging

n o t e s
The differentiation takes place in Step 6 where spices and flavouring

mixtures are added. The advantage of postponing the point of differ-
entiation is that it helps in reducing inventories. Additionally, the time
period for which an organisation has to carry out forecasting at the
variant level is also reduced. These lead to improved customer service
and reduced product obsolescence. The postponement of the point of
differentiation can also help in reducing transportation costs. Let us
now discuss how the postponement of the point of difference helps in
reducing transportation costs.
8.4.1 POSTPONEMENT FOR REDUCING TRANSPORTATION

COST
Usually, the differentiation process is postponed for producing cus-

tomised products as per the requirements of customers. However, or-
S
ganisations may also use the postponement strategy for delaying the
operational process to a later stage in the supply chain with an aim to
reduce transportation cost. There are organisations that achieve this
reduction in transportation cost by shifting the assembly of the final
IM
(bulky) finished products towards the customers’ end. This practice
is generally followed in cases where the product can be transported
as a kit consisting of various parts, which can be easily assembled by
the customer after he/she purchases it. In such a case, transportation
costs are significantly reduced because transporting kits is easier and
cheaper as compared to the transportation of a finished product.
M
Organisations that manufacture bicycles in India have been quite

successful in implementing the postponement strategy. Bicycle man-
ufactures usually manufacture cycle frames, handles and transmis-
sion parts in-house whereas all other parts such as tyres, tubes, seats,
N
brakes, etc. are sourced through their respective suppliers. Retail deal-
ers of bicycles stock frames and other components separately. When a
customer arrives, he/she chooses a particular bicycle (from catalogue
or display) and finalises his/her order. After this, the dealer instructs
his/her technician to assemble the demanded bicycle using the frame
and other components. This assembly time takes about 15-30 minutes.
After the completion of assembly, the bicycle is handed over to the
customer. The advantage to the bicycle manufacturer is that the kits
are less prone to damage as compared to the fully assembled bicycles.
Also, kits require less space as compared to the fully assembled bicy-
cles; therefore, more kits can be transported in a transporting vehicle
as compared to the number of fully assembled bicycles.
Bicycle manufacturers initially used this strategy to lower their costs.

However, this strategy can also be used to offer a number of variants
to customers, which is an added advantage for bicycle manufacturers.
The bicycle industry can introduce mass customisation by designing
modular components and allowing customers to choose a combina-
tion of modules, which the dealer can assemble as per customers’ re-
quirements.

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8.4.2 ADVANTAGES AND DISADVANTAGES OF

POSTPONING THE POINT OF DIFFERENTIATION
The postpone strategy is helpful in the following cases:

Mass product customisation
Modular product designs
Large fluctuations or variability in demand
Large transportation lead time
Small value addition during transportation
Small lead time in postponed operation
Large value addition in the postponed operation
As discussed above, the postponement strategy brings various ad-
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vantages such as reduced inventory, warehousing and transportation
costs and increased responsiveness to customers. However, there are
some problems associated with the postponement strategy. These
problems are as follows:
IM
Economies of scale are reduced due to mass customisation
Product quality may be affected (in certain cases) when a manu-
facturer shifts the final assembling processes to the dealers’ end
Relationship with other members of the supply chain may get af-
fected
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10. Postponing the point of differentiation involves shifting the

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point of differentiation towards the end of the ________curve.

11. Due to postponement of the point of differentiation, the time
period in which a firm has to carry out forecasting at the
variant level is also reduced. (True/False)
Activity
Using the Internet, find information on benefits received by organ-

isations by postponing the point of differentiation. Prepare a list of
such benefits.
RE-ENGINEERING IMPROVEMENT IN
8.5
SCM
An organisation usually tends to alter the shape of the value-addition
curve so that maximum cost addition takes place as late as possible
in the supply chain. This is shown in Figure 8.3, which presents two

n o t e s
curves namely the existing value-addition curve and the proposed val-
ue-addition curve:
Existing Value-addition Curve
Cost
S
Proposed Value-addition Curve
Time
IM Figure 8.3: Change in the Shape of Value Addition Curve
For analysing the curves (shown in Figure 8.3), the organisation needs
to differentiate between cost-intensive and time-intensive activities.
Activities which can be completed within a short time, but require a
high cost are cost-intensive activities; whereas activities that require a
lot of time, but only a small cost are time-intensive activities.
M
To shift cost addition at the later stages of the supply chain, a manu-
facturer should rearrange all activities in such a way that maximum
time-intensive activities are carried out during the initial period of
supply chain whereas cost-intensive activities are carried out during
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the later stages of the supply chain. To accomplish the rearrangement

of activities, cost per unit of time can be used as a parameter of activi-
ties to arrange activities in an ascending order.
You have already studied the significance of postponing the point

of differentiation. Let us now discuss the cost- and time-related pa-
rameters of the postponement process. Take the example of Reliance
Communications, a large telecommunications company in India. The
company keeps on extending its telecommunications network which
requires it to lay down the fibre optic network. Most telecommunica-
tion companies usually follow a pre-determined sequence to lay down
their network, which is as follows:
a. Procuring optical cable
b. Obtaining the right of way
c. Trenching
d. Laying of cable
e. Starting the network

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Procuring an optical cable is a cost-intensive activity and involves

huge capital expenditure whereas trenching is a time-intensive activ-
ity. This usual sequence involved initial cost outlays and time outlays
at the end of the value-addition curve. Due to this, the shape of the
proposed value-addition curve remained similar to the original val-
ue-addition curve.
Reliance Communications found that something was wrong with the

existing sequence of activities and restructured the sequence to mod-
ify the shape of the existing value-addition curve. Reliance shifted the
activity of buying optical cables after the trenching activity. The activ-
ity of trenching involved laying of a conduit within which the optical
cable could be laid later. After the trenching activity (time-intensive)
was over, Reliance purchased the optical cable which was laid in the
conduit. After this restructuring, the Reliance Communications’ val-
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ue-addition curve looked like the dotted curve as shown in Figure 8.3.

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12. To shift cost addition to the later stages of the supply chain,
a manufacturer should rearrange all activities in such a way
that maximum time-intensive activities are carried out during
the ___________.
13. Rearrangement of activities according to time-intensive and
cost-intensive can be done by using cost per unit of time as a
M
parameter of activities to arrange activities in an ascending

order. (True/False)
Activity
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Using various sources, find information on organisations whose

supply chain management performance has been improved by
making changes in the shape of the value-addition curve.
8.6 SUMMARY
Supply chain mapping is a method that identifies existing supply
chain processes.
Three dimensions of supply chain processes based on which re-
structuring of supply chain is done includes: value addition curve,
point of differentiation and customer entry point.
To map the value-addition curve, a reverse route (backward) from
the point where the value is delivered to the end customer is taken
and all activities are mapped in two dimensions: time and cost.
Pointof differentiation refers to the stage at which the product is
modified or differentiated and becomes a specific variant of the
end product.

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The customers’ entry point in the supply chain is at the end of

the value addition curve and coincides with delivery time of the
product.
Supply chain restructuring is all about integrating product and
process engineering with supply chain functions.
Supply chain restructuring involves introducing innovative con-
cepts, such as product redesign, process redesign and network re-
design, in the supply chain to improve customer service. It also
involves taking into consideration existing supply chain processes
and architecture.
A differentiation process is an activity that results in producing
differentiated products using the base products.
The advantage of postponing the point of differentiation is that it
S
helps in reducing inventories.
The postponement of the point of differentiation can also help in
reducing transportation costs.
IM
There are organisations that achieve reduction in transportation
cost by shifting the assembly of the final (bulky) finished products
towards the customers’ end.
Organisations that manufacture bicycles in India have been quite
successful in implementing the postponement strategy.
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Problems with Implementing the Postponement Strategy include:

economies of scale are reduced due to mass customisation; rela-
tionship with other members of the supply chain may get affected.
To shift cost addition at the later stages of the supply chain, a man-
ufacturer should rearrange all activities in such a way that max-
N
imum time-intensive activities are carried out during the initial

period of supply chain whereas cost-intensive activities are carried
out during the later stages of supply chain.
key words
Configure to Order (CTO): A process where products are as-

sembled and organised based on customer requirements.
Customer entry point: A point in the value addition curve at
which a customer places an order.
Customisation: The process of making a product as per the re-
quirements of the customer.
Delivery lead time: The amount of time that elapses between
when a customer order is received and the product is delivered.
Point of differentiation: The stage at which the product is mod-
ified or differentiated and becomes a specific variant of the end
product.

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Product differentiation: A marketing process that focuses dis-

playing the differences between products.
Restructuring: A process or activity that brings about drastic
changes in the process/procedure/entity to which it is applied.
Value-addition curve: A curve that can be obtained by plotting
the time on the x-axis and the total cost (cumulative) on the
y-axis in the supply chain graph.

1. Discuss the concept of supply chain mapping.
2. Explain the three dimensions of supply chain mapping in detail.
S
3. Explain why is it beneficial for an organisation to advance the
point of entry.
4. Discuss how postponing the point of differentiation helps an
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organisation.
5. Explain how altering the shape of the value-addition curve can
be used for improving the supply chain management.

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Supply Chain Mapping 1. False
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2. Time; cost
3. True
4. Variant
5. False
Supply Chain Process 6. True
Restructuring
7. Postpone the point of differentia-
tion, alteration in the shape of the
value-addition curve, advancement
in the customer ordering point
8. Advancing in the customer order-
ing point.
9. False
Postponing the Point of 10. Value-addition
Differentiation
11. True

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Re-engineering 12. Initial period of supply chain
Improvement in SCM
13. True

1. Supply chain mapping is a method that identifies existing supply
chain processes. Refer to Section 8.2 Supply Chain Mapping.
2. Supply chain processes can be identified on the basis of
three dimensions: shape of the value-addition curve, point of
differentiation and customer entry point in the supply chain.
Refer to Section 8.2 Supply Chain Mapping.
3. It is beneficial for an organisation to advance the point of entry
S
because by doing so most of the activities can be accomplished
against an order. When activities are done on the basis of order,
the level and importance of forecasting reduces. Refer to Section
IM
8.3 Supply Chain Process Restructuring.
4. By postponing the point of differentiation, organisations can move
from MTS model to CTO model which leads to cost reduction.
Refer to Section 8.4 Postponing the Point of Differentiation.
5. Shifting cost addition at the later stages of the supply chain, a
manufacturer should rearrange all activities in such a way that
M
maximum time-intensive activities are carried out during the

initial period of supply chain whereas cost-intensive activities
are carried out during the later stages of supply chain. Refer to
Section 8.5 Re-engineering Improvement in SCM.
N
SUGGESTED READINGS

n o t e s
E-REFERENCES
(2017).Retrieved 6 July 2017, from https://www.researchgate.net/
publication/297512042_Postponing_product_differentiation
Coursera | Online Courses From Top Universities. Join for Free.
(2017). Coursera. Retrieved 6 July 2017, from https://www.cour-
sera.org/learn/supply-chain-management/lecture/sSMkP/post-
ponement
Supply Chain Restructuring: Considerations for Change – The Jour-
nal of Healthcare Contracting. (2017). Jhconline.com. Retrieved 6
July 2017, from http://www.jhconline.com/supply-chain-restruc-
turing-considerations-for-change.html
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C h a
9 p t e r
METRICS AND DRIVERS OF SUPPLY CHAIN
CONTENTS
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9.1 Introduction
9.2 Framework for Supply Chain Drivers
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9.2.1 Facilities
9.2.2 Inventory
9.2.3 Transportation
9.2.4 Information
9.2.5 Sourcing
9.2.6 Pricing
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Activity
9.3 Managing Performance with Metrics
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Activity
9.4 Supply Chain Operations Reference (SCOR) Model
Activity
9.5 Summary

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CISCO — AN EXAMPLE OF RESPONSIVE SUPPLY CHAIN

WITH EFFICIENT TRANSPORTATION AND WAREHOUSING
SYSTEM
S
Source: www.livemint.com
Cisco Systems, Inc. is one of the leading companies engaged in

IM
providing parts and services for leading businesses, educational
institutes, government sectors and home networks. The compa-
ny is well-known among its customers for providing repair or re-
placement of failed enterprise routers and switches guaranteed
within 24 hours. For this, the company required an effective sup-
ply chain. However, the major challenge that the company faced
M
is associated with costs for in-house warehousing and transpor-

tation.
Cisco contacted Ryder System, Inc. to solve the issues of trans-

portation and warehousing for designing the supply chain. Ryder
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was known for delivering solutions related to commercial trans-

portation, logistics and supply chain management across North
America, Europe and Asia. Ryder developed customised ware-
house management solutions to manage warehousing operations
in Cisco. The new system helped Cisco in developing the same day
Key Performance Indicators (KPIs). Through the new system, the
company also tracked its inbound shipments and outbound or-
ders to fulfil orders accurately. An important program developed
for Cisco’s warehouse management was Excess Returns Program
to help the problems of overstocking. In each quarter of the year,
Cisco sent its excess products to Ryder’s warehouse, where these
products were re-packaged with new labels. This helped Cisco in
making a clean product delivery to other customers.
To manage transportation issues in the case of emergencies

(product failure at customers’ site), Ryder offered services for
‘next flight out’ orders, emergency courier management, export
documentation, audit for global shipments and carrier pre-alert
distribution to enable a 24-hour turnaround.

METRICS AND DRIVERS OF SUPPLY CHAIN 245
n o t e s
Through Ryder’s services and visibility, Cisco was able to increase

transparency for parts in transit. Consequently, the company’s
supply chain became strong and effective. This further led to an
increase in both customer and technician satisfaction.
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learning objectives

>> Discuss the concept of supply chain driver
>> Explain the framework for supply chain drivers
>> Explain the six major supply chain drivers
>> Describe how to manage performance with metrics
>> Discuss the Supply Chain Operations Reference (SCOR)
model
9.1 INTRODUCTION
S
In the previous chapter, you have studied the supply chain process
restructuring. In this chapter, let us discuss the metrics and drivers
of supply chain. A successful supply chain consists of certain drivers
that govern the responsiveness and competitiveness of an organisa-
IM
tion with regard to its supply chain network. In an organisation, these
drivers serve as metrics that measure the performance of its supply
chain network.
There are six main supply chain drivers. While three of them are lo-
gistical drivers, the rest are cross-functional drivers. Logistical drivers
are involved in the movement of products from a supply centre or an
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organisation to a demand centre or end users.
On the other hand, cross-functional drivers help in making a supply

chain effective by aligning it with other organisational functions, such
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as marketing, sales and manufacturing. Logistical drivers include fa-

cilities, inventory and transportation, while cross-functional drivers
include information, sourcing and pricing.
In this chapter, you will study the framework for supply chain drivers
in detail. You will also study how to manage performance with met-
rics. Moreover, you will study the SCOR model.
FRAMEWORK FOR SUPPLY CHAIN

9.2
DRIVERS
In the present dynamic business scenario, every organisation needs to
have a competitive edge over the rest. To achieve this, organisations are
adopting different processes and technologies for aligning the capabil-
ities of their supply chains with their business strategies. This is also
required to maintain a balance between supply chain efficiency and re-
sponsiveness. For this, organisations require examining different supply
chain drivers and utilising them appropriately. A supply chain driver is a
factor that enables a supply chain to operate efficiently and responsive-
ly. There are six key supply chain drivers, as listed in Figure 9.1:

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Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Figure 9.1: Key Supply Chain Drivers
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A supply chain’s performance depends on interaction among these six
key supply chain drivers. Let us first discuss the framework for struc-
turing these drivers. The supply chain of each organisation targets at
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aligning its competitive strategy with its supply chain strategy for in-
creased efficiency and responsiveness. To achieve this, organisations
require structuring a suitable combination of all these six drivers of
a supply chain. These drivers interact with one another to determine
the supply chain’s responsiveness. Figure 9.2 shows the framework
for structuring these drivers:
M
Competitive Strategy
Supply Chain
N
Strategy
Efficiency Responsiveness
Supply Chain Structure
Logistical Drivers
Facilities Inventory Transportation
Information Sourcing Pricing
Cross-Functional Drivers
Figure 9.2: Framework of Interactions

between Supply Chain Drivers
Source: Supply Chain Management (Strategy, Planning, and Operation)
by Sunil Chopra and Peter Meindl

n o t e s
Figure 9.2 shows that it is important for an organisation’s supply chain

strategy to support its competitive strategy. A supply chain strategy
seeks to achieve efficiency and responsiveness. To accomplish supply
chain activities effectively, both logistical drivers (inventory, facilities
and transportation) and cross-functional drivers (sourcing, informa-
tion and pricing) are used.
Let us consider an example to understand this framework. ABC Lim-

ited is a retail organisation with a competitive strategy that intends
to achieve efficiency and responsiveness through its supply chain. To
accomplish this, ABC can include both logistics and cross-functional
drivers in its supply chain in the following manner:
The organisation can maintain low levels of inventory to maintain
supply chain efficiency.
S
It can employ its own fleet to increase awareness and ensure bet-
ter product availability.
It can use its central distribution centres to enhance efficiency
IMwith fewer facilities.
It can ensure a smooth flow of information throughout its supply
chain network to improve responsiveness.
It can define valid criteria for selecting suppliers to determine re-
liable and efficient sources for selling its products.
It can adopt the Everyday Low Pricing (EDLP) scheme to confirm
M
a steady demand for its products.
Therefore, by utilising a structured framework of a supply chain, ABC

can synchronise its supply chain strategies.
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9.2.1 FACILITIES
Facilities are physical locations in a supply chain network that are

used for manufacturing, storing and transporting products. There are
different types of facilities in a supply chain, such as:
Plant sites
Factories
Warehouses
Distribution centres
The efficiency and responsiveness of a supply chain depend on the

capacity, location and flexibility of facilities. For example, a distributor
who wants to respond quickly to customers should choose a facility
that is located near the consumption centre. An organisation usual-
ly makes long-term decisions related to facilities in its supply chain.

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Therefore, it considers various factors before deciding on facilities,

including:
Transportation costs
Production capacity
Customer demand
Market uncertainties
9.2.2 INVENTORY
Inventory refers to the stock of materials or goods owned by a busi-

ness with an aim of production and sale. It includes the following:
Raw materials that are used to manufacture products
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Work-in-progress or goods at the semi-finished stage
Finished goods or final output
It is essential to maintain an appropriate level of inventory in an or-

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ganisation to meet the increasing demands of customers and avoid
under-stocking or over-stocking of products. Based on their role in
the entire process of customer satisfaction, there are five main types
of inventories held by an organisation. Figure 9.3 shows these catego-
ries:
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Cycle
Inventory
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Obsolete Transit
Inventory Inventory
Types of
Inventories
Seasonal Safety
Inventory Inventory
Figure 9.3: Types of Inventories
Let us now discuss these different types of inventories in detail.

Cycle inventory: This type of inventory is available or is planned
to be made available to meet the normal demand of customers
during a given period. If supply lead times and customer demands

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are known, the cycle inventory is only required to meet the regular
demand.
Transit inventory: This refers to the inventory that is dispatched
by the seller, but is still not received by the respective purchaser.
Its level depends on the distance between the manufacturing fa-
cility and consumption centres. If the distance is large, then the
transit inventory level increases.
Safety inventory: This refers to the extra inventory stored by an
organisation to deal with any unintended and unanticipated situ-
ations, such as stock-outs. The level of safety inventory is higher
than that of the regular cycle inventory because it helps the organ-
isation to deal with uncertainties in product demand or supply.
Seasonal inventory: This inventory is held by an organisation to
meet its seasonal demand. For example, the demand for raincoats
S
and umbrellas increases during the rainy season. Seasonal inven-
tory helps an organisation to meet fluctuations in demand caused
by unstable production during a specific season.
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Obsolete inventory: This inventory includes only non-moving
items, which are expected to have low demand in future.
An organisation can make its supply chain more efficient and respon-
sive by managing its inventories effectively. For example, if a large
amount of inventory is stocked near consumption centres, it will help
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the organisation to meet customer demand on time.
9.2.3 TRANSPORTATION
Transportation refers to the movement of products from one location

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to another, such as from a supplier to a manufacturer. It directly im-

pacts the product delivery schedules of an organisation. Therefore, it
plays a crucial role in ensuring the effectiveness and responsiveness
of a supply chain.
A supply chain becomes more responsive with faster transportation

means. For example, 7-Eleven is a world-renowned supply chain based
in Japan. To move its products across various geographical stores,
it uses a responsive transportation system to refill its stocks several
times a day. This transportation system has also reduced transporta-
tion costs of the company.
An organisation needs to take various strategic decisions to make its

transportation responsive and cost effective. These decisions are de-
scribed as follows:
Long-term decisions: These decisions determine the availability
and appropriateness of various transportation modes to be used
for a long duration. The organisation selects a primary mode of
transportation for appropriate inbound or outbound movement of

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inventory among various facilities. It also needs to decide the lev-

el of outsourcing required for the chosen mode of transportation.
For example, an organisation can use contractual transporters to
move products from centralised stock locations to regional cross-
dock facilities for packaging, sorting and delivering small batches
to customers.
Lane operation decisions: These decisions determine daily op-
erational freight transactions. The organisation uses real-time in-
formation to coordinate the movement of products along inbound
and outbound shipping lanes among facilities to meet customer
demands. Lane operation decisions include the following areas for
consideration:
Temporal consolidation
Inbound/outbound consolidation
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Carrier consolidation
Vehicle consolidation
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Transportation mode decisions: These decisions are related to the
carrier and mode for the movement of goods in a specific freight
transaction. For example:
Rail container services can be used for long distances in an
economical way.
Truck load carriers are used for overnight freight movements
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to deliver within 24 hours at reasonable rates.
9.2.4 INFORMATION
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Information refers to the consolidated data associated with various

facets of a supply chain, such as transportation, facilities, prices, costs,
customers and suppliers. The efficiency and responsiveness of a sup-
ply chain depend on timely and accurate information. If suitable in-
formation is not provided, various supply chain activities may suffer,
including:
Warehouse management
Inventory control
Transportation planning
Development of customer service standards
Design procurement
Operation of supply and distribution systems
Information also impacts other supply chain drivers. For example, a

pharmaceutical company can produce suitable quantities of a product
using demand forecasting techniques, provided it has adequate infor-
mation about customer demand patterns.

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Information determines all decisions related to supply chain activi-

ties. If information is correct, it improves coordination among various
units of the supply chain and thus maximises total profitability.
9.2.5 SOURCING
Sourcing is an array of business processes used to purchase and deliv-

er products and services. It includes the selection of suppliers for var-
ious supply chain activities, such as production, storage, information
management and transportation. It determines whether a particular
supply chain activity should be performed in-house or outsourced.
These decisions impact the efficiency and responsiveness of a supply
chain considerably. For example, efficiency of Motorola improved con-
siderably when it outsourced a major part of its production to China.
However, its responsiveness suffered because of increased transporta-
S
tion costs and delivery schedules.
While designing the sourcing process, an organisation should consid-

er the following steps:
IM
1. Decide which tasks should be outsourced.
2. Decide whether to source these tasks from one supplier or
multiple suppliers.
3. In case of multiple suppliers, create a portfolio that defines the
role of each supplier.
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4. Define appropriate criteria for the selection and measurement of

the performance of suppliers.
5. Choose suitable suppliers based on the criteria.
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6. Negotiate contracts with the selected suppliers.
This sourcing process may help the organisation to maintain a con-

sistent and accurate information flow across the various stages of a
supply chain and improve its performance.
9.2.6 PRICING
Pricing is a process that is used to determine the amount charged by

an organisation for making its products and services available to cus-
tomers. This process impacts the purchase decisions of customers to
a large extent. It also plays a critical role in matching the supply and
demand of products in the market. For example, an organisation can
offer short-term discounts to customers to reduce excess supply.
Consider an example to understand the significance of pricing in a

supply chain. Costco Wholesale Corporation is a membership-based
warehouse company located in the US. It follows a policy for main-
taining stable but low prices for its products. Due to stable prices, its
products have a consistent demand as customers are ready to wait for

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products. As a result, Costco can target a broad range of customers,

while maintaining its existing customer base. It has reshaped its sup-
ply chain according to its pricing policies and customer demands.
1. _______________ are the physical locations in a supply

chain network that are used for manufacturing, storing and
transporting products.
2. Finished goods or final outputs come under which of the
following:
a. Facilities
b. Transportation
c. Inventory
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d. Sourcing
3. Sourcing determines whether a particular supply chain
activity should be performed in-house or outsourced. (True/
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False)
4. ________ refers to the consolidated data associated with
various facets of a supply chain.
5. Stable prices may help an organisation in maintaining
consistent demand for its products by customers. (True/False)
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6. ______________ decisions determine the daily operational

freight transactions.
7. Which of the following inventory type includes only non-
moving items, which are expected to have low demand in
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future?
a. Transit inventory
b. Safety inventory
c. Obsolete inventory
d. Seasonal inventory
Activity
Suppose you run a bakery. Create a framework for utilising differ-

ent supply chain drivers appropriately to achieve maximum effi-
ciency with high responsiveness.
MANAGING PERFORMANCE WITH

9.3
METRICS
It is crucial for organisations to improve their supply chain perfor-
mance to meet increased customer demands on time. For this, they

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should regularly evaluate and manage the performance of their sup-

ply chains. The management of supply chain performance is a compli-
cated process. It includes different activities such as:
Monitoring inventory levels
Tracking the current status of shipments
Ensuring that the right orders are dispatched to right places
Therefore, different performance metrics are used for measuring and

managing the performance of a supply chain. An organisation should
choose a metric based on its need and usage. For example, some or-
ganisations use metrics that can be easily applied, but these metrics
fail to provide an accurate picture of supply chain performance. On
the other hand, some organisations use metrics that focus on the per-
formance of logistics only. These metrics may negatively impact other
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parts of the supply chain. Therefore, an organisation should consider
some basic requirements while choosing a metric. The requirements
are as follows:
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The metric should be simple to decipher.
The metric should use an objective value to express the results of
measurement.
The metric should provide consistent results after each measure-
ment process.
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Metric should accurately measure processes in the appropriate

business context.
The metric should be retrievable at reasonable costs.
Let us now discuss some common performance measurement metrics:

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Inventory carrying cost: This is the cost incurred by an organi-

sation to store its inventory over a given duration. It enables the
organisation to determine the expected profits on its current in-
ventory. It also enables suppliers to map their cycles of production.
The formula for calculating the inventory carrying cost is as
follows:
Inventory carrying cost = Inventory carrying rate × Average

inventory value
Inventory turnover: This metric determines the number of times
an organisation sells its entire inventory. It indicates the demand
and quality of inventory carried by the organisation. The formula
to calculate this metric is as follows:
Inventory turnover = Cost of goods sold/Average inventory

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If the inventory turnover is high, then the supply chain is

efficient. If it is low, then the supply chain is inefficient, leading to
low revenue generation.
Inventory-to-sales ratio: This metric determines the level of
inventory carried by an organisation as compared to the number
of completed sales orders. Its formula is as follows:
Inventory to sales ratio = Inventory value/Sales value

Cash-to-cash cycle time: This metric calculates the amount of
time for which the operating capital is occupied. The formula used
for calculating cash-to-cash cycle time is as follows:
Cash-to-cash cycle time = Materials payment date – Customer or-

der payment date
S
If the cash-to-cash cycle time is fast, then the supply chain is effec-
tive for the organisation.
Rate of return: This metric determines the rate at which the dis-
IM
patched items are returned to an organisation. It helps the organ-
isation to determine the reasons and ways by which it can reduce
the amount of products returned by customers.
Back order rate: This metric determines the number of orders
that could not be processed at the time of placing the order. If the
back order rate is high, it implies that customers are compelled
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to wait while the organisation tries to process the order, resulting

in customer dissatisfaction. Therefore, every organisation should
aim for a low back order rate.
Perfect order rate: This metric determines orders that are dis-
N
patched without any incident of inaccuracy, damaged goods or late

delivery. If the perfect order rate is high, the organisation is effi-
cient and customers are highly satisfied.
Fill rate: This metric calculates the percentage of orders processed
in the first shipment. It is calculated using the following formula:
Fill rate = {1 – [(Total items - Shipped items)/Total items]} × 100

Average payment period for production materials: This metric
estimates the average time from the receipt of materials to their
payment. It helps the organisation to determine the efficiency of
its supply chain. It can be computed using the following formula:
Average payment period for production materials = (Materials

payables/Total cost of materials) × Days

n o t e s
Exhibit
Performance Measure in Supply Chain
The performance measure in a supply chain refers to an assessment

of the performance of the following aspects of the supply chain:
General operation level in the supply chain
Node enterprises in the supply chain
Mutual relations between the various node enterprises
Therefore, performance measure is basically a framework of per-

formance measurement related to various business processes in
the supply chain.
S
8. In an organisation, supply chain drivers serve as __________

IM that measure the performance of its supply chain network.
9. The metric should use an objective value to express the results
of measurement. (True/False)
10. Which of the following supply chain performance metric
determines orders that are dispatched without any incident of
inaccuracy, damaged goods or late delivery?
M
a. Rate of return
b. Back order rate
c. Fill rate
N
d. Perfect order rate
Activity
Select a leading manufacturing organisation of your choice. Using

the Internet, find performance metrics that the organisation uses
for measuring and managing the performance of its supply chain.
Write a short note on it.
SUPPLY CHAIN OPERATIONS

9.4
REFERENCE (SCOR) MODEL
To help organisations in improving the effectiveness of their supply
chains, the Supply-Chain Council (SCC) designed a Supply Chain
Operations Reference (SCOR) model. As the world’s leading supply
chain framework, the SCOR model links business processes, perfor-
mance metrics, skills and practices into a unified structure. This is
done to increase the speed of system implementations, support organ-

n o t e s
isational goals and improve inventory turns. Thus, the SCOR model
provides a process-based methodology to supply chain management.
The SCOR model helps an organisation to address, improve and con-

vey supply chain management decisions related to various entities
within and outside the organisation. Moreover, it illustrates processes
in the entire supply chain and offers an outline to improve them.
This model incorporates business concepts for process re-engineer-

ing, standardisation and measurement in its framework. The SCOR
model focuses on five stages of the supply chain, which are shown in
Figure 9.4:
Plan
S
Source
Make
IM
Deliver
Return
M
Figure 9.4: Stages Involved in the SCOR Model
Let us discuss each stage in detail.

1. Plan: This is the first stage in a supply chain, which includes the
following activities:
N
Planning and management of demand and supply

Balancing various resources with respect to requirements
Establishing communication throughout the entire chain
Designing the following business rules for enhancing and
measuring supply chain effectiveness:
99Inventory rules
99Shipping rules
99Assets rules
99Authoritarian compliance rules
2. Source: This is the second stage in which the organisation
sources the required infrastructure and acquires the material.
This stage explains the following activities:
How to handle inventory, the supplier system, supplier con-
tracts and competence

n o t e s
How to deal with supplier payments

When to receive, authenticate and transfer products
3. Make: This is the third stage that focuses on manufacturing and
production. It involves the following activities:
Production
Packaging
Staging
Releasing
Handling the production system, equipment, facilities and

shipment
4. Deliver: This is the fourth stage that focuses on the administration
of final inventories, assets, shipment, product life cycle and import
S
and export prerequisites. It includes the following activities:
Order management
IM Storage
Shipment
Receiving orders from different customers

Invoicing customers after they receive products
5. Return: This is the final stage in a supply chain, where an
M
organisation manages the return of packaging, containers or

faulty products. It consists of the administration of the following:
Business rules
Return products
N
Assets
Shipment
Regulatory prerequisites
There are numerous benefits of the SCOR model, such as:

It helps the organisation to identify the efficiency of its supply
chain.
It enables the organisation to understand how the five stages of
the SCOR model are consistent and repetitive among the organi-
sation, its suppliers and customers. Each stage acts as a linkage in
the supply chain, which is crucial for a product to successfully pass
through each level.
It helps to evaluate various supply chain problems.
It provides full impact of capital investment, development of a
supply chain roadmap, configuration of business operations and
a standard range of two to six times Return on Investment (ROI).

n o t e s
11. According to the SCOR model, the ____________ stage of

supply chain focuses on the administration of final inventories,
assets, shipment, product life cycle and import and export
prerequisites.
12. According to the SCOR model, packaging comes under which
of the following stages of supply chain?

a.
Plan b.
Source

c.
Make d.
Deliver
13. Each supply chain stage in the SCOR model acts as a separate
element in the supply chain. (True/False)
S
Activity
Find information on the implementation of the SCOR model in

IM
a famous manufacturing organisation. Prepare a report on your
findings.
9.5 SUMMARY
A supply chain driver is a factor that enables a supply chain to op-
M
erate efficiently and responsively.

The six key supply chain drivers are:
1. Facilities
N
2. Inventory
3. Transportation
4. Information
5. Sourcing
6. Pricing
Facilities
are the physical locations in a supply chain network
which are used for manufacturing, storing and transporting prod-
ucts.
Inventory refers to the stock of materials or goods owned by a
business with an aim of production and sale.
Based on the role in the entire process of customer satisfaction,
there are five main types of inventories held by an organisation:
1. Cycle inventor`y
2. Transit inventory
3. Safety inventory

n o t e s
4. Seasonal inventory
5. Obsolete inventory
Transportation refers to the movement of products from one loca-
tion to another, such as from a supplier to a manufacturer.
An organisation needs to take various strategic decisions to make
its transportation responsive and cost-effective. These decisions
are classified as:
Long-term decisions
Lane operation decisions
Transportation mode decisions
Information refers to the consolidated data associated with vari-
ous facets of a supply chain, such as transportation, facilities, pric-
S
es, costs, customers and suppliers.
Sourcing is an array of business processes used to purchase and
deliver products and services.
IM
Pricing is a process used to determine the amount charged by an
organisation for making its products and services available to cus-
tomers.
There are different metrics for measuring supply chain perfor-
mance. An organisation should choose a metric based on its need
and usage.
M
To help organisations in improving the effectiveness of their sup-

ply chains, the Supply-Chain Council (SCC) designed a Supply
Chain Operations Reference (SCOR) model.
N
The SCOR model helps an organisation to address, improve and

convey supply chain management decisions related to various en-
tities within and outside the organisation.
key words
Inventory control: A process of administering and managing

storage, supply and accessibility of materials to keep an ade-
quate supply chain level for meeting customer demand.
Lead time: A period between the beginning and execution of a
process.
Stock-out: A situation of inventory shortfall that occurs due to
inefficient management of inventory, unexpected demand, dis-
ruptions in replenishment or delays in production.
Temporal consolidation: A process of combining different or-
ders at a definite time for managing batch transactions.
Warehouse management: A process of controlling the storage
and movement of materials within a warehouse.

n o t e s

1. What do you understand by supply chain drivers? Discuss the
framework for structuring these drivers.
2. Discuss facilities as a key supply chain driver.
3. Explain major types of inventories held by an organisation.
4. Discuss some common performance measurement metrics.
5. Write a short note on the SCOR model.
S
Framework for Supply Chain 1. Facilities
Drivers
IM
2. c. Inventory
3. True
4. Information
5. True
6. Lane operation
7. c. Obsolete inventory
M
Managing Performance with 8. Metrics

Metrics
9. True
10. d. Perfect order rate
N
Supply Chain Operations Refer- 11. Deliver

ence (SCOR) Model
12. c. Make
13. False

1. A supply chain driver is a factor that enables a supply chain
to operate efficiently and responsively. Refer to Section 9.2
Framework for Supply Chain Drivers.
2. Facilities are the physical locations in a supply chain network,
which are used for manufacturing, storing and transporting
products. Refer to Section 9.2 Framework for Supply Chain
Drivers.
3. Based on the role in the entire process of customer satisfaction,
there are five main types of inventories held by an organisation,
which include cycle inventory, transit inventory, safety inventory,

n o t e s
seasonal inventory and obsolete inventory. Refer to Section 9.2

Framework for Supply Chain Drivers.
4. Inventory carrying cost, inventory turnover, inventory to sales
ratio, rate of return, cash-to-cash cycle time, back order rate, etc.
are some common performance measurement metrics. Refer to
Section 9.3 Managing Performance with Metrics.
5. The SCOR model is the world’s leading supply chain framework
that links business processes, performance metrics, skills and
practices into a unified structure. Refer to Section 9.4 Supply
Chain Operations Reference (SCOR) Model.
SUGGESTED READINGS
S
IM
Kale, S. (2013). Production and Operations Management (1st ed.).
M
E-REFERENCES
(2017). Performance Drivers. Retrieved 30 June 2017, from http://
www.performancedrivers.com.au/knowledge-centre/technical/
what-is-scor-model.shtml
N
APICS - The Premier Association for Supply Chain Management.

(2017). Apics.org. Retrieved 30 June 2017, from http://www.apics.
org
Basu. (2017). Supply chain drivers. Slideshare.net. Retrieved 30
June 2017, from https://www.slideshare.net/mech.anupam/sup-
ply-chain-drivers
The SCOR Model for Supply Chain Strategic Decisions - SCM |
Supply Chain Resource Cooperative (SCRC) | North Carolina State
University. (2017). Scm.ncsu.edu. Retrieved 30 June 2017, from
https://scm.ncsu.edu/scm-articles/article/the-scor-model-for-sup-
ply-chain-strategic-decisions
What is Supply Chain Management (SCM)? - SCM | Supply Chain
Resource Cooperative (SCRC) | North Carolina State University.
(2017). Scm.ncsu.edu. Retrieved 30 June 2017, from https://scm.
ncsu.edu/scm-articles/article/the-scor-model-for-supply-chain-
strategic-decisions.

C h
10 a p t e r
SUPPLY CHAIN STRATEGIES AND

PERFORMANCE MEASURES
CONTENTS
S
10.1 Introduction
10.2 Customer Service and Cost Trade-off
IM
Activity
10.3 Internal and External Performance Measures
Activity
10.4 Linking Supply Chain and Business Performance
M

Activity
10.5 Enhancing Supply Chain Performance
10.5.1 Supply Chain Optimisation
N
10.5.2 Supply Chain Integration

10.5.3 Supply Chain Restructuring
Activity
10.6 Summary

n o t e s
SUPPLY CHAIN STRATEGIES AT DELL COMPUTER
In 1995, Dell Computers adopted ‘Dell Direct Model’ after realis-

ing the benefit of collaborative supply chain. This model includes
a high velocity and cheaper distribution system with direct cus-
tomer relationships and build–to–order manufacturing. Dell has
been able to save significant cost and time after implementing
collaborative supplier relationships. In addition, it has been able
to maintain a competitive edge in the market for several years.
S
IM
Source:www.wsj.com
The Just-in-Time (JIT) inventory system was a major part of the

M
collaborative supply chain of Dell. In order to implement JIT, Dell

first trimmed down the number of its suppliers from 204 to 47.
Dell’s suppliers were required to have their warehouses at a max-
imum of 15 minutes distance from Dell’s manufacturing facilities.
The JIT system at Dell had reduced the inventory costs of the
N
organisation. This enabled the organisation to reduce the deliv-

ery time of products to end-customers from 30 to 13 days. In ad-
dition, the JIT system led to easy customisation of Dell products,
reduced wastage of inventory and increased the ability to adjust
production levels.
The collaborative supply chain had enabled Dell to manage its

product orders effectively by sharing information, costs, risks and
joint decision making. As a result, the inventory turnover of the
organisation had reduced by 57% and the production space had
increased due to the decreased inventory storage area. Conse-
quently, the growth rate of Dell reached as high as 50% in the next
two years and its annual sales reached $12 billion in 1997.
However, from the last few years, due to changing market trends,
Dell’s PC business experienced a considerable market share loss-
es. In order to deal with this situation, Dell has transformed its
core principles and formulated a new supply chain strategy called
the ‘End user computing’ growth plan. The strategy focuses on

SUPPLY CHAIN STRATEGIES AND PERFORMANCE MEASURES 265
n o t e s
simplifying the business, gaining new market share, employing

end-user computing solutions and identifying alternate comput-
ing solutions.
Dell has introduced a ‘Smart Selection’ programme where it

could pre-build the most popular PC configuration that custom-
ers want and ship them within 24 hours. The new model is called
build-to-order (BTO) model. The model provided a wider spec-
trum of options to customers to choose from. The BTO model has
changed the whole supply chain landscape for Dell. Moreover,
close relationships with customers through direct sales, helped
Dell in meeting the demand and maintaining low inventory as
possible. With all new and improvised strategies, Dell can now
customise their SKUs for different countries and channels. This
S
further helped Dell in lowering costs and driving revenue.
Apart from the direct sales model and BTO model, another major
characteristic of Dell’s supply chain strategy is strong supplier in-
IM
tegration. Dell has strong supplier network spread in all over the
world, including countries like China, India, U.S., etc. Some of
the biggest suppliers of Dell are Samsung, Motorola, Sony, Sanyo,
etc. that supply components to Dell as per the pre-defined code
of conduct. Dell considers its suppliers an essential part of its suc-
cess as they help Dell in minimising inventory and maximising
speed.
M
Dell demands its suppliers to provide materials at high speed.

This is done due to the facts that Dell does not hold inventory
more than six days. In order to meet the high inventory velocity,
suppliers retain their stock near Dell’s plant, or start their man-
N
ufacturing centre around them, or even build their warehouses

near Dell. At some plants Dell uses Vendor Inventory System
where the components supplied by supplier are kept in truck only
and are taken by Dell as per the need. Here, suppliers need to
take care of the inventory till it is been taken off by Dell.
For implementing all the supply chain processes effectively, Dell

focuses on building a close relationship with its suppliers. Dell
has established a website called valuechain.dell.com, through
which Dell’s suppliers can get information on the stage of inven-
tory in supply chain, requirement data, new part transitions, etc.
on time.
Thus, these three supply chain strategies (direct sales model, BTO
model and supplier integration) are the most basic strengths of
Dell. These strategies help Dell in lowering cost by holding mini-
mum inventory, reducing number of mediators in the distribution
channel and helping customers to customise orders as per their
choices.

n o t e s
learning objectives

>> Discuss the trade-off between customer service and operat-
ing cost
>> Explain the internal and external performance measures
>> Discuss how supply chain is linked to business performance
>> Explain how supply chain performance can be improved in
an organisation
10.1 INTRODUCTION
In the previous chapter, you studied the metrics and drivers of sup-
S
ply chain. Now, let us move forward and study business performance
measures vis-à-vis supply chain strategies.
IM
In simple words, a strategy refers to a plan of action formulated to
achieve certain goals. A supply chain strategy refers to the plan of ac-
tion organisations take regarding the execution of their supply chain
cycle to achieve business goals, such as reduction in manufacturing
cost or cycle time, gaining competitive advantage, providing better
and timely services to the customers, etc. A well-formulated and ef-
fective supply chain strategy leads to efficient logistics, which helps to
M
reduce the costs of the overall business and increase customer service
levels, thus increasing profitability.
In order to assess the effectiveness of any strategy, organisations take

cognisance of various internal as well as external performance mea-
N
sures. One tried-and-tested measure to ensure and evaluate the ef-

fectiveness of a supply chain strategy is benchmarking supply chain
performance using financial data. Supply chain strategies cannot be
considered effective if these strategies cannot result in improved busi-
ness performance, such as improvement in distribution system, incre-
ment in market share, etc. Therefore, linking supply chain with the
overall business performance is very crucial for measuring the effec-
tiveness of the supply chain cycle. In case supply chain strategies are
not able to increase business performance, the organisation needs to
improve its supply chain performance. Improvement in supply chain
can take place with the help of techniques such as supply chain op-
timisation, supply chain integration and supply chain restructuring.
The chapter begins with a discussion on customer service and cost

trade off. Next, you will study various internal and external perfor-
mance measures. In addition, the chapter discusses how a supply
chain is linked to the business performance of an organisation. Final-
ly, the chapter discusses how supply chain performance can be en-
hanced.

n o t e s
CUSTOMER SERVICE AND COST TRADE-

10.2
OFF
In a modern and highly competitive business environment, an organ-
isation can hardly be successful without being highly efficient. How-
ever, being and remaining efficient is a tight-rope walk for an organ-
isation, as it has to continuously face many trade-offs. For example,
one of the most important trade-offs faced by manufacturing organi-
sations is customer service and cost trade-off. Let us understand how
this trade-off works.
If a manufacturer maintains too much inventory, it has to incur high

amounts of inventory costs. Therefore, to reduce overall costs, a man-
ufacturer would like to keep minimum possible inventory. However,
low inventory exposes the manufacturer to the risk of stock out sit-
S
uation, in which it fails to supply goods to customers, as and when
demanded. Therefore, to improve customer service, a manufacturer
would like to keep a high level of inventory. Now, you can see the di-
IM
lemma of the manufacturer in keeping the right inventory level while
trying to maintain a balance between low cost and effective customer
service. Lowering costs result in ineffective service and effective cus-
tomer service comes at a higher cost. In such a circumstance, a trade-
off balance between cost and customer service level is maintained, in
which inventory levels are maintained at a relatively lower level and
customer service is maintained at a relatively higher level. When the
M
customer service level and supply chain cost trade-off is plotted in the
graph, it is called the supply chain’s ‘efficiency frontier’. Figure 10.1
shows the supply chain’s efficiency frontier:
N
Total Supply Chain Cost
Starting Point
Current
Efficient Frontier
New
Efficient Frontier
Optimized Strategy
Service Level
Figure 10.1: Supply Chain’s Efficiency Frontier
As can be seen in Figure 10.1, a manufacturer cannot increase cus-

tomer service level without increasing the supply chain cost while be-

n o t e s
ing in the current efficient frontier. The figure also shows that a man-
ufacturer can achieve the goal of lower supply chain cost and higher
customer service level by moving up to a higher efficiency frontier.
The service level and supply chain cost trade-off points towards the
importance of managing inventory levels to achieve competitive ad-
vantage. Most organisations consider inventory mainly as a cost head.
However, inventory can be managed to reduce costs, provide better
customer service and increase revenue. This notion leads to the con-
cept of Inventory Optimisation (IO). A large number of organisations
have been benefitted by adopting IO. It is very common for companies
to reduce up to 30% of inventory after implementing IO. For exam-
ple, Hewlett Packard (HP) saved more than $130 million, Microsoft
increased inventory turn by 18-20% while increasing fill rates by 6-7%
and Procter & Gamble reduced inventory level by $100 million (Effi-
S
cient Frontier: A Moving Target).
IO intends to achieve a balance between customer service level and

supply chain cost by considering the following factors:
IM
Order delivery lead time and supply chain lead time: It refers
to the time taken by a manufacturer to deliver the finished prod-
uct after receiving an order. The main objective of modern ‘lean’
manufacturing is to reduce the lead time so that customer satisfac-
tion can be increased. For example, if e-retailing giant promises to
deliver products within 48 hours of receiving the order, its order
M
delivery cannot exceed 48 hours; else, it will result in customer

dissatisfaction.
Supply chain lead time refers to the total time starting from the
procurement of raw materials to delivery of the finished goods to
N
customers. Therefore, supply chain lead time includes the order

delivery lead time as well as sourcing and manufacturing time.
This is shown in Figure 10.2:
Customer order
Order penetrations point
(decoupling point) Order delivery lead time
Source Make components Assembly Delivery
Supply chain lead time
Figure 10.2: Supply Chain Lead Time and Order Delivery Lead Time
As can be seen in Figure 10.2, a typical organisation sources ma-
terial from suppliers, manufactures components, assembles the

n o t e s
products and delivers the finished products to the end users. IO

aims at optimising the order delivery lead time and supply chain
lead time to create the balance between supply chain cost and cus-
tomer service.
Push-pull boundary of a supply chain: All activities in a supply
chain can be categorised into push or pull depending upon wheth-
er the activity is being conducted in anticipation of a customer or-
der (push) or because a customer order has already been placed
(pull). The push-pull boundary separates these two processes, as
Push-pull
Boundary
S
Push Pull
IM
Supply chain lead time
Figure 10.3: Push-Pull Boundary

Apple follows the push strategy in which it anticipates a huge de-
mand for its products from the market and strives to expedite the
M
manufacturing process to meet these demands. On the other hand,

Dell computers start assembling a product only when they receive
an order. This means Dell computers adopts the pull strategy.
The balance between customer service and supply chain cost is
N
established on the basis of the position of the push-pull boundary;

that is whether the organisation is pursuing a pull strategy or push
strategy.
Supply chain responsiveness: It refers to the capability of the sup-
ply chain of an organisation to meet market demands in a given
period of time. A highly responsive supply chain possesses the fol-
lowing abilities:
Ability to handle supply uncertainty
Ability to deal with a large assortment of products
Ability to deliver in short lead times
Ability to cater to wide fluctuations in market demand
Ability to provide high level of customer service
Delivery reliability: Delivery reliability is a crucial aspect of cus-
tomer service and it reflects the extent to which an organisation is
able to provide service to its customers within the promised deliv-

n o t e s
ery time. Delivery reliability is measured by the fraction of custom-

er demand that is fulfilled within the specified delivery lead time.
Product variety: The assortment of products or service offered by
an organisation is a crucial aspect of customer service. In the last
two decades, an explosion of product assortment has taken place
in most product categories. Higher product assortment offers a
wide variety of choice to the customer who is willing to get a prod-
uct that fits closest to his or her real requirement.
1. In order to improve customer service, a manufacturer needs

to keep a high level of inventory. (True/False)
2. A manufacturer can achieve the goal of lower supply chain cost
S
and higher customer service level by shifting to a _________
efficiency frontier.
3. Customer service and inventory cost has a trade-off
IM relationship (True/False)
4. ________refers to the total time starting from the procurement
of raw materials to delivery of the finished goods to the
customers.
5. Under the pull strategy, supply chain functions are carried out
only after receiving customer orders. (True/False)
M
6. The extent to which an organisation is able to provide service

to its customers within the promised delivery time is known
as ______________.
N
Activity
With the help of the Internet, conduct a research on how large man-
ufacturers balance the supply chain and customer service trade off.
Prepare a report on it.
INTERNAL AND EXTERNAL

10.3
PERFORMANCE MEASURES
In the last section, you studied the trade-off between supply chain cost
and the level of customer service. You also studied that how this trade-
off is one of the most important factors in designing the supply chain
strategy of an organisation. Now, let us study how the performance of
the supply chain strategy of an organisation can be measured.
The effectiveness of supply chain strategies is measured on the basis

of certain performance measures. These performance measures can
be both external and internal to an organisation and are shown in
Figure 10.4:

n o t e s
INTERNAL LEVELS
Cycle time or lead time

Inventory levels
Resource utilisation level
EXTERNAL LEVEL
Customer satisfaction level
Figure 10.4: Internal and External

Performance Measures of Supply Chain
S
Let us now study each of these measures in detail:
Cycle time or lead time: Cycle time or lead time of any business
process refers to the end-to-end time of any process. While mea-
IM
suring the efficiency of a supply chain, two important lead times
are taken into consideration. These measures are supply chain
lead time and order-to-delivery lead time. You have already stud-
ied both these types of lead times in the last section. The efficien-
cy level of the supply chain strategies of two organisations can be
compared with the help of their lead time. For example, suppose A
M
and B are two close competing automobile companies and the sup-
ply chain lead time of the organisations are 15 days and 21 days,
respectively. From this, you can conclude that company A has a
more efficient supply chain.
N
Inventory levels: High inventory levels make organisations incur

additional inventory carrying costs. Therefore, to achieve sup-
ply chain efficiency, an organisation should maintain just about
as much inventory as required. Generally, there are four types of
inventory hold in the supply chain of an organisation. These are
raw materials, work-in-process (including semi-finished and un-
finished goods), finished goods and spare parts. An organisation
holds different levels of each of these types as they serve different
purposes. An efficient supply chain maintains the optimal levels
of these four types of inventory. Therefore, as you can see, the ef-
ficiency of a supply chain is reflected by the level of inventory it
maintains.
Resource utilisation level: The supply chain of an organisation
deploys various types of resources, such as:
Manufacturing resources (equipment)
Warehousing resources (storage facilities)
Logistics resources (cargo carriers)

n o t e s
Human resource (knowledge, skills, experience, etc.)

Financial resources (working capital)
The efficiency of a supply chain is reflected by how these resources

are utilised to achieve the supply chain objectives, such as minimis-
ing lead time, optimising inventory level and providing best customer
services.
Customer satisfaction level: Customer satisfaction level is a sub-
jective factor and it depends upon a number of indices, such as:
Delivery lead time: It refers to the time span between the
placement of an order by a customer and delivery of the goods
to the customer.
Order fill rate: It refers to the fraction of customer demands
met by the available stock.
S
Stockout rate: It refers the fractions of orders cancelled due to
unavailability of goods in stock. As you can see, stock out rate
is complementary to order fill rate.
IM
Backorder level: It refers to the number of orders that are yet
to be filled.
Probability of on-time delivery: It refers to the fraction of or-
ders fulfilled within the promised delivery time.
M
If the customer satisfaction level is high, the supply chain of a compa-

ny can be said to be efficient.

N
7. ______________ refers to the fraction of customer demands

met by the available stock.
8. Stockout rate refers to the number of orders that are yet to be
filled. (True/False)
Activity
With the help of the Internet, conduct a research on the supply

chain performance of three leading retailers, operating in India.
Make a presentation on it.
LINKING SUPPLY CHAIN AND BUSINESS

10.4
PERFORMANCE
In the previous section, you studied how supply chain performance
can be measured with the help of a number of internal and external

n o t e s
performance measures. Now, let us see how the supply chain function
is related to the business performance of an organisation.
Business performance refers to the extent to which an organisation

achieves its different goals, such as market share, new product de-
velopment, revenue, competiveness, cost reduction, quality improve-
ment, lead time reduction, attrition rate reduction, etc. The supply
chain of an organisation impacts its performance in different areas.
For example, Walmart would hardly be able to achieve its business
goal of assuming a cost leadership position in the retail industry
without having one of the most efficient supply chain infrastructures
across industries.
An important indicator of business performance is Return on Assets

(ROA). Two of its critical components are cost reduction and incre-
ment in revenue and profitability. Let us study how the goals of in-
S
creasing ROA can be accomplished by an efficient supply chain in the
following points:
Cost reduction: This objective can be accomplished by:
IM
Decreasing indirect material expenditures
Decreasing logistics expenditures
Decreasing stocks
Decreasing direct material expenditures
M
Increase in revenue and profitability: This goal can be accom-

plished by:
Reducing time-to-market
Decreasing backorder and forfeiture sales
N
Selling higher profit and revenue giving goods and services

Penetrating into new markets
Reducing delivery time to market
Utilising supply chain assets efficiently
Decreasing souring of procurement expenditures
Decreasing stocks
Decreasing accounts receivables
9. Decreasing the stock level can result in the reduction of supply

chain cost of an organisation. (True/False)
10. Revenue can be increased by increasing the time-to-market.
(True/False)

n o t e s
Activity
Make a group of your friends and discuss the importance of linking

business performance with the supply chain of a firm. Prepare a
short note based on the outcome of your discussion.
ENHANCING SUPPLY CHAIN

10.5
PERFORMANCE
In the first section of the chapter, you studied that an organisation
cannot meet the dual goal of reducing cost and improving customer
service without shifting to a more efficient frontier. In other words, im-
provement in supply chain performance is necessary to reduce supply
chain costs and achieve customer satisfaction.
S
In real life, most organisations are usually not able to manage their
supply chain procedures smoothly. As a result, the position of their
supply chain efficiency frontiers is always at some distance from the
IM
optimal efficiency frontier. The only way organisations can meet their
goals is by moving to a higher efficiency frontier. Going to a higher
efficiency frontier requires organisations to optimise, integrate and
restructure their supply chain cycles.
Let us next study how organisations can improve their business per-
formance by implementing optimisation, integration and restructur-
M
ing of supply chain.
10.5.1 SUPPLY CHAIN OPTIMISATION

N
In simple words, optimisation of supply chain refers to reaching the

optimal performance level of the manufacturing and distribution sup-
ply chain of an organisation. Optimisation of supply chain involves an
extensive application of mathematical models and computer software
to determine optimal inventory level and minimise supply chain cost.
The following are some important steps taken towards optimising the
supply chain of an organisation:
Localise: In the highly globalised market place, ‘think globally,
act locally’ has become the mantra of success for business organ-
isations. Therefore, while looking for growth opportunities in the
global market, an organisation also needs to look for sourcing op-
portunities in the local market. Business organisations can also
consider developing multiple sourcing channels to optimise the
supply chain.
Focus on the strengths: Organisations need to focus on the busi-
ness functions in which they have competency and outsource ac-
tivities that can be outsourced at lower cost.

n o t e s
Collaborate for better forecasting: Increased collaboration with

suppliers and retailer puts organisations in a better position to
forecast demand and maintain an optimal inventory level. Collab-
oration also helps in increasing customer satisfaction as customer
demands are met more efficiently and stockouts are reduced.
Use innovative technology: Technology plays a very crucial role
in supply chain optimisation as technology enables integration,
coloration, information sharing, etc. An organisation needs to
have access to innovative supply chain technologies to optimise its
supply chain. Walmart is a noteworthy example of an organisation
that made revolutionary changes in its supply chain with the help
of technological products such as Radio-Frequency Identification
(RFID) and Electronic Data Interchange (EDI).
Build responsive supply chain: In order to optimise the supply
S
chain, an organisation needs to use information such as Point of
Sale (POS) data, market trends, etc. This information enables sup-
ply chains to respond more efficiently to demand fluctuations.
IM
10.5.2 SUPPLY CHAIN INTEGRATION
In simple words, supply chain integration refers to close alignment or

coordination within a supply chain. An inefficient supply chain con-
sists of connected but uncoordinated set of activities that extends to
various organisational functions, where every individual function has
M
its own budget and set of priorities and measurements. Some compa-
nies have discovered that total distribution costs can be reduced by
integrating such distribution related activities.
Integrated supply chain is the system that coordinates among various

N
supply chain functions and the parties involved. Integrated logistics

is especially useful for the manufacturing businesses. Manufacturing
organisations are under constant pressure to produce goods at a lower
cost. Price is an important aspect on the basis of which competition
among various manufacturers take place. Integrated supply chain
helps in reducing supply chain costs which in turn increases their
competitiveness.
Figure 10.5 shows an integrated supply chain system:
Inventory Flow
Physical Manufacturing
Customer Procurement Suppliers
Distribution Support
Information Flow
Figure 10.5: Integrated Supply Chain

n o t e s
A successful integrated supply chain ties all supply chain activities in

a system, which minimises the total costs and maintains the desired
customer service level. It is necessary to state that the total cost in-
cludes the following five major cost categories of a supply chain:
1. Customer service level achievement costs
2. Transportation costs
3. Warehousing costs
4. Lot quantity costs
5. Inventory carrying costs
LOGISTICAL INTEGRATION
Information flow plays a vital role in the process of supply chain in-
tegration. Effective supply chain is perceived as a competency that
S
associates an organisation with its customers and suppliers. As men-
tioned previously, the information about the customers flows through
the organisation in the form of sales activity, estimate and orders.
IM
10.5.3 SUPPLY CHAIN RESTRUCTURING
At times, integrating the supply chain is not enough to achieve the

desired results and the level of optimality. In such cases, major trans-
formations may be required in the structure of the supply chain. The
need of supply chain restructuring may be triggered by a number of
M
factors, such as internationalisation of business, high demand fluctua-

tions, structural loopholes in the supply chain, etc.
Supply chain restructuring includes critical changes in the supply

chain structure in the way material and information flows are man-
N
aged. Restructuring of supply chains helps organisations move the

entire efficiency frontier downwards and in the right direction, result-
ing in lower costs and higher customer service. A few ways in which
supply chains can be restructured are:
Decreasing the quantity of stock in distribution
Separating fast moving and slow moving products in terms of ma-
terial in chain
Redesigning products and procedures
By restructuring its supply chain, an organisation moves the whole

frontier downwards.
Some of the benefits of supply chain restructuring include:

Integrating with new business areas
Lowering process and personnel costs
Increasing efficiency all over the organisation
Improving process quality
Providing better customer service

n o t e s
11. _____________ supply chain is the system that coordinates

among various supply chain functions and the parties involved.
12. Integrated supply chain helps in increasing supply chain costs
which in turn increases their competitiveness. (True/False)
13. Which of the following is the major reason for supply chain
restructuring?
a. Internationalisation of business
b. High demand fluctuations
c. Structural loopholes in the supply chain
d. All of the above
S
14. By restructuring its supply chain, an organisation moves the
whole frontier downwards. (True/False)
IM
Activity
With the help of the Internet, find out a case of supply chain re-
structuring, study the case, and make a report on your findings.
10.6 SUMMARY
M
In a modern and highly competitive business environment, an or-

ganisation can hardly be successful without being highly efficient.
However, being and remaining efficient is a tight-rope walk for an
organisation, as it has to continuously face many trade-offs.
N
Lowering costs results in ineffective service and effective custom-

er service comes at a higher cost.
When the customer service level and supply chain cost trade-off is
plotted in the graph, it is called supply chain’s ‘efficiency frontier’.
A manufacturer can achieve the goal of low supply chain cost and
high customer service level by moving up towards a higher effi-
ciency frontier.
IO intends to achieve a balance between customer service level and
supply chain by considering a number of factors, such as order de-
livery lead time and supply chain lead time, push-pull boundary of
supply chain, supply chain responsiveness and delivery reliability.
The effectiveness of supply chain strategies is measured on the
basis of certain performance measures. These performance mea-
sures can be both internal and external to an organisation.
Some measures of supply chain performance include cycle time
or lead time, customer satisfaction level, inventory levels and re-
source utilisation levels.
Business performance refers to the extent to which an organisa-
tion achieves its different goals, such as market share, new prod-

n o t e s
uct development, revenue, competiveness, cost reduction, quality

improvement, lead time reduction, attrition rate reduction, etc.
Supply chain of an organisation can be improved with the help
of supply chain optimisation, supply chain integration and supply
chain restructuring.
Optimisation of supply chain refers to reaching the optimal perfor-
mance level of the manufacturing and distribution supply chain of
an organisation. Optimisation of supply chain involves extensive
application of mathematical models and computer software to de-
termine optimal inventory level and minimise supply chain cost.
Supply chain integration refers to close alignment or coordination
within a supply chain. An inefficient supply chain consists of con-
nected but uncoordinated set of activities that extends to various
organisational functions, where every individual function has its
own budget and set of priorities and measurements. Some compa-
S
nies have discovered that total distribution costs can be reduced
by integrating such distribution related activities.
Supply chain restructuring includes critical changes in the supply
IM
chain structure in the way material and information flows are man-
aged. Restructuring of supply chains helps organisations move the
entire efficiency frontier downwards and in the right direction, re-
sulting in lower costs and higher customer service.
key words
M
Bottom line: The line in a financial statement showing net prof-

it or loss of the organisation in a given time period.
EDI: The system of transferring data from one computer sys-
tem to another.
N
Lean manufacturing: A systematic method that intends to

eliminate all wastes in a manufacturing system.
Receivables: Monetary obligations owed to an organisation by
its debtors, customers, etc.
RFID: An information technology tool used for identifying and
tracking objects attached with tags.
Time-to-market: The time span between concept generation of
a product and its introduction in the market.
Work-in-process: Inventory goods that are currently in differ-
ent stages of production.

1. Explain the trade-off between customer service and supply chain
cost.
2. Write a short note on order delivery lead time and supply chain
lead time.

n o t e s
3. Explain the concept of Inventory Optimisation (IO).

4. Discuss how the performance of the supply chain strategy of an
organisation can be measured.
5. What do you mean by supply chain optimisation? How can this
be achieved?
6. Write a short note on supply chain restructuring.

Customer Service and Cost Trade-off 1. True
S
2. Higher
3. True
4. Supply chain lead time
IM
5. True
6. Delivery reliability
Internal and External Performance 7. Order fill rate
Measures
8. False
Linking Supply Chain and Business 9. True
M
Performance
10. False
Enhancing Supply Chain Performance 11. Integrated
12. False
N
13. d. All of the above

14. True

1. A trade-off balance between customer service level and supply
chain cost occurs when inventory levels are maintained at a
relatively lower level and customer service is maintained at a
relatively higher level. Refer to Section 10.2 Customer Service
and Cost Trade-off.
2. Order delivery lead time and supply chain lead time refer to the
time taken by a manufacturer to deliver the finished product
after receiving an order. Refer to Section 10.2 Customer Service
and Cost Trade-off.
3. Inventory Optimisation (IO) is a method of managing inventory
to reduce costs, provide better customer service and increase
revenue. Refer to Section 10.2 Customer Service and Cost
Trade-off.

n o t e s
4. The effectiveness of supply chain strategies is measured on

the basis of certain performance measures, which can be both
external and internal to an organisation. Refer to Section 10.3
Internal and External Performance Measures.
5. In simple words, optimisation of supply chain refers to reaching
the optimal performance level of the manufacturing and
distribution supply chain of an organisation. Refer to Section
10.5 Enhancing Supply Chain Performance.
6. Supply chain restructuring includes critical changes in the
supply chain structure in the way material and information flows
are managed. Refer to Section 10.5 Enhancing Supply Chain
Performance.
S
SUGGESTED READINGS
IM
M
E-REFERENCES
Customer Service Level. (2017). Lcm.csa.iisc.ernet.in. Retrieved
N
10 July 2017, from http://lcm.csa.iisc.ernet.in/scm/coimbatore/

node14.html
Restructuring: 4flow – Supply Chain Consulting, Supply Chain Soft-
ware, Supply Chain Services. (2017). 4flow.de. Retrieved 10 July
2017, from http://www.4flow.de/en/supply-chain-consulting/strate-
gy/restructuring.html
Supply Chain Restructuring: Considerations for Change – The Jour-
nal of Healthcare Contracting. (2017). Jhconline.com. Retrieved 10
July 2017, from http://www.jhconline.com/supply-chain-restruc-
turing-considerations-for-change.html
Trinh, T. (2017). Push and pull strategy in supply chain manage-
ment. Academia.edu. Retrieved 10 July 2017, from http://www.ac-
ademia.edu/6081016/Push_and_pull_strategy_in_supply_chain_
management

C h
11 a p t e r
CASE STUDIES
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CONTENTS
Case Study 1 Appealing Operations Strategy of Ginger-The Budget Hotel

Case Study 2 Netflix’s Focus on Niche Strategy
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Case Study 3 Jet Airways-Turnaround Strategies
Case Study 4 Disney’s Pixar Acquisition
Case Study 5 Cost Leadership Strategy of Virgin Australia Airlines Pty. Ltd.
Case Study 6 Process Planning at Mcdonald’s
Case Study 7 Capacity Expansion at Amul
Case Study 8 A&R Logistics – Building 3Pl Service from a Dry Bulk Transport
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Base
Case Study 9 Implementation of Lean Production Method by Jaguar
Case Study 10 Postponement Strategy Followed by Long Grove Confectionery Co.
Case Study 11 Implementation of the Scor Model By Expresspoint
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Case Study 12 Supply Chain Optimisation through Application of Data Analytics

Case study 1
n o t e s
APPEALING OPERATIONS STRATEGY OF GINGER-THE

BUDGET HOTEL
This Case Study discusses the operations strategy adopted by a

chain of budget hotels across India. It is with respect to Chapter 1
of the book.
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IM
Source: http://www.gingerhotels.com
ABOUT GINGER HOTELS
Established in 2003, Roots Corporation Limited (RCL) runs a

chain of hotels with the name Ginger hotels across the country.
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RCL is the wholly-owned subsidiary of Indian Hotels Company

Limited (IHCL) and runs the first of its kind Smart Basics™ chain.
Ginger Hotels has slowly carved a niche for itself amongst brand-
ed budget hotels in the country and today boasts of being a hotel
N
of choice for leisure and business travellers who are looking for
comfort and luxury at competitive prices.
Incorporated in 1902 by the founder of the Tata Group, Mr. Jam-

setji Nusserwanji Tata, IHCL also operates one of the biggest and
most luxurious group of hotels across not only India, but also in
South Asia- the Taj Hotels, Resorts and Palaces.
In June 2004 with the launch of the Smart Basics™ concept of

Ginger Hotels, the Indian hospitality industry witnessed a revo-
lution with a rise of the GenNext category of hotels. The Ginger
hotels have a brand image that signifies simplicity and yet are
stylish and affordable. The business objective of Ginger is to offer
a superior service with no additional cost or compromise on qual-
ity. Legendary corporate strategy thinker, Dr C. K. Prahalad was
instrumental in strategising the concept of Ginger hotels in India
which have been indigenously designed and developed by IHCL.
RCL currently operates more than 35 Ginger Hotels in over 20
cities in India today.

Case study 1: APPEALING OPERATIONS STRATEGY OF GINGER-THE BUDGET HOTEL 283
Case study 1
n o t e s
GINGER’S OPERATIONS STRATEGY
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Seen at the first time, the Ginger property seems just like any
other hotel of this range and offers similar facilities that include
check in facilities, amenities in the room like refrigerator, TV, cof-
IM
fee machine/electric kettles, Wi-Fi, conference halls, fitness ame-
nities, cab services, currency exchange etc. However some of the
distinguishing features of Ginger hotels that form an intimate
part of its operations strategy are:
Affordable meals: The hotels serve nominally priced ala carte
meals with limited items in the menu. However, the guests
M
have an option to order food from outside restaurants and re-

ceive it at the Give n’ Take counters of the hotels.
More room for rooms: The rooms in the hotels are well-main-
tained but compact. This leads to a win-win situation for both
N
the hotel as well as the guests. The saving on space helps the
hotel have more space available to accommodate more rooms,
at the same time making the rooms rentals more affordable for
the guests. This gives Ginger a competitive edge over others.

Case study 1
n o t e s
Concept of self-help: The booklets and brochures of Ginger

hotels carry a prominent tag line “Please help yourselves”.
This is a reflection of the most differentiating trait of the hotel
i.e. self-service. A majority of guests in these hotels carry out
self check at their kiosks. On entering a Ginger hotel, many
operational interfaces are self-serviced, some of which are:
Self-service check-in: The hotels have check in kiosks
that can be used by guests, thus eliminating the need of
assistance from the front office or reception desk.
S
IM
M
Source: www.indianholiday.com
Smart Get Set: Instead of placing an ironing board and

iron in every room, Ginger hotels have dedicated an iron-
ing room on every floor that can be used by a guest. A
common facility leads to a smaller capital investment. The
N
floors also have common water dispensing machines for

the guests.
Smart Marts: The hotel premises also house vending ma-
chines for toiletries and common usage items like mosqui-
to repellents, combs, toothpaste, items of personal hygiene
etc.
Smart Knick Knacks: Vending machines with hot and
cold beverages, packaged snacks are available too in the
hotel premises and function 24x7.
Give and take counters: These counters facilitate hando-
ver of to be washed linen and laundry items that can be
collected by the guests once done. Also as mentioned earli-
er, guests can collect ordered food from the outside at this
point.
The company’s strategy behind this way of operating and func-

tional design of the hotels is to offer no frill, smart and intelligent
facilities at a competitive price.

Case study 1: APPEALING OPERATIONS STRATEGY OF GINGER-THE BUDGET HOTEL 285
Case study 1
n o t e s
questions
1. Discuss the operational and strategic benefits that Ginger

hotels are likely to enjoy with functional style and design
of ginger hotels.
(Hint: The rooms in the hotels are compact but well
maintained. This leads to a win-win situation for both the
hotel as well as the guests.)
2. Discuss the overall operations strategy and its alignment
with the objective of Ginger hotels.
(Hint: The operations strategy of Ginger is to offer a
superior service with no additional cost or compromise
on quality.)
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IM
M
N

Case study 2
n o t e s
NETFLIX’S FOCUS ON NICHE STRATEGY
This Case Study discusses how the niche focused strategy helped
Netflix in capturing global audience. It is with respect to Chapter 2
of the book.
S
IM
Source: http://www.netflix.com
Reed Hastings and Marc Randolph on August 29, 1997 formed

Netflix, an entertainment company that started out its operations
from Scotts Valley, California. The core competency of the com-
pany is its service offering in streaming media, video on demand
online and DVD by mail. After almost 16 years of operations, the
M
company expanded its footprint to film and television production

and online distribution. The company is currently headquartered
in Los Gatos, California.
Netflix’s operations started with DVD sales and rental, but Hast-
N
ings disbanded DVD sales after a year of operations so that they

could focus on the model that involved DVD rental by mail. Net-
flix expanded its service line with streaming media in 2007, at the
same time the DVD and Blu-ray rental service was retained. In
the year 2010, the company went international and streaming was
made available to customers based in Canada.
In 2013, Netflix entered the space of content production with its

first series “House of Cards”. Ever since, the company has contin-
uously expanded with the production of both film and television
series. The company offers “Netflix Original” content through its
online library of films and television. In 2016, the company re-
leased an estimated 126 original series or films which is far great-
er than that of any other network or cable channel.
In 2017, Netflix had 109.25 million streaming subscribers world-

wide. The company’s leaping growth and its ability to penetrate
the well-established market specialising in video rental followed

Case study 2: NETFLIX’S FOCUS ON NICHE STRATEGY 287
Case study 2
n o t e s
by content production is an accomplishment worth noticing. Net-

flix and other internet-distributed video services transformed the
practice of the television industry radically. It is intriguing to un-
derstand Netflix’s operations strategy and its ability to evolve and
build its subscriber base despite of strong competition in the vid-
eo rental industry.
THE NICHE SERVICE LINE
Netflix became the front runner in the personalised film DVD

services by mail in the late 1990s. Rental industry gradually died
down due to the ease of service by mail. At the same time the tele-
vision industry was experiencing a massive change. Local cable
channels began the broadcast of television series like “The Sopra-
S
nos” and “The Shield” which were based on complex storylines
that aimed viewership by niche audiences. Since the revenue for
these channels came from both subscribers and advertisers, de-
spite of limited viewership they could survive the television in-
IM
dustry. In the early 2000s, technology advancement took place
in compression technology. Together with high-speed internet
services reaching more and more homes, it became possible to
stream large video files over the Internet. These developments set
ground for Netflix to further its business lines in 2007 from DVDs
by mail to a national video streaming service. Television series
M
now became an integral part of the company’s business model.

Television accounted for roughly 70% of the service’s streaming
by the summer of 2016.
DIFFERENT MODEL, DIFFERENT STRATEGY

N
A broadcast wave remained the centre stage technology for tele-

vision distribution for many years due to its ability to send a wire-
less signal over huge swaths of the country. However a disadvan-
tage of the broadcasting technology is that it can send only one
message at a time to everyone in its range. On the other hand,
video streaming services such as Netflix have a unique ability to
deliver programming as per the demand via the Internet. So the
viewers have an option to select what and when to watch instead
of watching “what’s being aired.” A traditional channel’s main
task is to create a schedule of programs whereas the key task of a
portal is to cultivate a library of programs. The portal in this case
tries to come up with different business strategies that, in turn,
lead to different programs.
The main difference in the revenue source between a broadcast

network or cable channels and portals like Netflix, Amazon Vid-
eo and SeeSo is that the broadcast network channels earn their

Case study 2
n o t e s
revenues by selling audiences to advertisers. On the other hand,

the portals are subscriber-funded, i.e. the viewer pays a periodic
fee for gaining an access to the library of content. A challenge to
survive for subscriber-funded services is that they must be able to
offer enough programming options so that viewers find value for
money in the subscription. For advertiser-funded television, the
success factor was a large viewer base for every program however
for the portals; the challenge is to provide enough value that sub-
scribers continue to pay. Many portals counteract this challenge
by offering a specific type of programming to the viewers. For ex-
ample, WWE Network offers its subscribers a higher amount of
wrestling matches and access to wrestling-related content than
viewers can get from other portals. On similar lines, Noggin, a
pre-schooler’s program portal, makes ad-free programming avail-
S
able for young viewers.
THE NETFLIX NICHE STRATEGY TO HARNESS THE

POTENTIAL OF THE INTERNET
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Despite the facts mentioned above, Netflix neither offers content
specific to a limited audience with a unique interests, nor does it
aspire for a mass audience. So the query remains as to how does
Netflix still manages to attract its 93 million subscriber base. One
of the contributing factors to the success of Netflix is its “con-
M
glomerated niche” strategy as a part of which Netflix develops

programs catering to a handful of a variety of areas of audience
interests. Some of these areas include action series like “Dare-
devil”, complicated serial dramas like “House of Cards”, horror
series like “Hemlock Grove” and some exclusive films that cast
N
some popular actors like Adam Sandler. The Internet distribution

makes it possible to apply a strategy like this as it lets a portal like
Netflix to cater to the needs of different audiences simultaneously
and separately.
Another factor that adds to the ability of Netflix to implement this

strategy is that the Internet distribution helps to collate and anal-
yse extensive data on subscribers’ behaviour and view patterns
that can be used to derive business intelligence for developing its
library (in alignment with the user needs). Netflix has maintained
secrecy about the kind of data being collected, but its ability to
collate data on viewing patterns across the globe has enabled the
service to identify micro-genres and then patterns of viewer in-
terest.

Case study 2: NETFLIX’S FOCUS ON NICHE STRATEGY 289
Case study 2
n o t e s
Source: www.ivacy.com
A QUEST FOR GEOGRAPHICAL EXPANSION
S
Netflix caters to the cultural and geographic viewership needs of
the global audience and not just distributing shows produced for
IM
the US audience. “Marseille,” a French political drama; or “Hi-
bana,” a Japanese drama are the examples of such series being
aired to the intended audience. With the growing number of sub-
scribers from other countries, Netflix’s library of original content
too has increased manifolds. Netflix’s foothold in the global mar-
ket has been so far the strongest and its experiment as a global,
subscriber-funded television portal is likely to be a major mile-
M
stone of the television history.
questions
1. With reference to the given case study, discuss the concept

N
of the niche focused strategy.

(Hint: Focus on the niche or specialised products strategy
is adopted by organisations that concentrate on selecting
a specific customer segment to cater to its specific needs
by customising the marketing mix and product mix.)
2. Discuss how the niche focused strategy adopted by Netflix
helped it to gain a foothold in the international market.
(Hint: The niche focused strategy allowed Netflix to
streamline its efforts and resources on a narrow and
specifically defined segment of a market, by providing
streaming media and video-on-demand online and DVD
by mail. Netflix develops programs catering to needs of
the global audience. The Internet distribution makes it
possible to apply a strategy like this as it lets Netflix to
cater to the needs of different audiences simultaneously
and separately.)

Case study 3
n o t e s
JET AIRWAYS-TURNAROUND STRATEGIES
This Case Study discusses the how one of the leading airlines of
India successfully turned profitable from a stage of huge losses by
implementing a turnaround strategy. It is with respect to Chapter 3
of the book.
S
IM
Source: www.jetairways.com
ABOUT THE COMPANY
Headquartered in Mumbai, the airline company Jet Airways was

incorporated as a limited liability company on 1 April 1992. The
M
company’s operations began as an air taxi on 5 May 1993 that con-

sisted of a fleet of four leased Boeing 737-300 aircrafts. On 14 Jan-
uary 1995, the airline received its scheduled airline status. In 2007,
the company acquired Air Sahara. In March 2004, Jet airways went
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international with its first flight from Chennai to Colombo. The

company became public with its listing on the Bombay Stock Ex-
change on 28 December 2004.
By 2010, Jet Airways became the largest carrier in the country

before being eclipsed by IndiGo. It was designated as the second
largest airline in India with 17.6% passenger market share, first
being IndiGo in May 2017. Today, the company operates nearly
300 flights to almost 68 destinations every day to worldwide loca-
tions. These flights operate between the main hub located at Ch-
hatrapati Shivaji International Airport Mumbai and secondary
hubs located at national and international airports like Amster-
dam Airport Schiphol, Chennai International Airport, Indira
Gandhi International Airport, Kempegowda International Air-
port and Netaji Subhas Chandra Bose International Airport.
ABOUT THE DOWNFALL AND RISE OF JET AIRWAYS
In the third quarter of 2015, Jet Airways reportedly posted a

whopping net profit of `467.1 crore which was stated to be the

Case study 3: JET AIRWAYS-TURNAROUND STRATEGIES 291
Case study 3
n o t e s
highest profit ever reported since the company started its oper-
ations. This came after the company implemented a turnaround
strategy that worked faster than what was anticipated.
Jet Airways struggled through a turbulent time in Mid-2014 as it

bled heavily and reported a dismal loss of `3,667 crore in 2013-14.
This was further followed by a loss of `217 crore in the first quar-
ter of the financial year 2014-15.
It was an operational challenge for the airline to pursue a com-

plex business strategy, that of running a low cost and yet a full
service carrier. The customers flying Jet were uncertain of Jet’s
offerings. They would wonder what to expect while flying Jet—a
complimentary meal or one to pay for.
S
IM
M
Source: www.jetairways.com
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The airlines also faced a challenge of non-uniform seat configu-

ration across its fleet with a variability of 8 to 16 in the number of
business class seats. Due to a variation in the number of economy
seats, the management struggled with this operational challenge
on how and where to deploy which aircraft.
Amidst this conflict, Cramer Ball, a turnaround specialist who

was then heading Air Seychelles, was appointed to lead Jet oper-
ations. As per Ball, who later went on to join Italian airline Alitalia
as its CEO, the airlines planned to reduce losses in 2015, consol-
idate in 2016 and turn profitable in 2017. Jet reportedly posted a
net profit of Rs. 467.1 crore in the third quarter of 2015 which was
the highest ever profit reported since the airline’s inception. The
management believed that the turnaround strategy appeared to
be working faster than they anticipated.
THE SOLUTION TO JET AIRWAY’S PROBLEM
The first step that the company took in the turnaround strategy
was to get away from the low cost aircraft model. A corporate cus-

Case study 3
n o t e s
tomer base saw an increase in subscription when a full-service

brand was added across the business translated. This was a huge
improvement from the earlier corporate customer base, which led
to higher yields.
The second step taken by the management was to standardise the

seat configuration with 12 business and 156 economy-class seats
in the domestic fleet. With this change the airline got the flexi-
bility to deploy its aircrafts both on domestic and international
routes flexibly as they were able to generate an additional capaci-
ty that was equivalent to nine B737s without any addition to their
original fleet.
S
IM
Source: https://goo.gl/images/u2LyGP
With this change in seat configuration, aircraft that operated in

M
domestic service could be deployed anywhere across the network.

Jet’s turnaround from a loss making business to sound profits be-
came visible from the quarterly results. However, to sustain the
turnaround, the company should focus on having a strong and
stable management.
N
questions
1. Discuss the factors that contributed to the reported

financial losses to Jet Airways in the FY 2013-14.
(Hint: It was an operational challenge for the airline to
pursue a complex business strategy, that of running a low
cost and yet a full service carrier.)
2. Discuss the turnaround strategy adopted by Jet airways
to overcome the financial losses.
(Hint: Turnaround strategies are defined as a set of
strategies that help in managing, establishing, funding
and fixing a distressed organisation. These strategies
aim at reversing the negative trend and turning around
the organisation to profitability. Jet Airways, in order to
overcome its problems, adopted the turnaround strategy
that helped the company to regain satisfactory levels of
profitability.)

Case study 4
n o t e s
DISNEY’S PIXAR ACQUISITION
This Case Study discusses the case of successful acquisition of

Pixar by Disney. It is with respect to Chapter 3 of the book.
Source: http://econ243.academic.wlu.edu
S
In 2006, The Walt Disney Company bought Pixar at a value of $7.4
billion, which was one of the biggest transactions made in the an-
imation industry.
IM
The Walt Disney Company was founded in 1923 by Walt and Roy
Disney and is known as one of the largest media and entertain-
ment corporations in the world. Pixar Animation Studios, on the
other hand, began its journey in 1979 as Graphics Group, a part
of the Computer Division of Lucasfilm. It was acquired by Steve
M
Jobs, the co-founder of Apple Computer, in 1986. Pixar is known

as one of the most prominent leader in the animation industry
for its film studio based in Emeryville, California. The studio has
earned 16 Academy Awards, 7 Golden Globes, and 11 Grammy
Awards, along with many other awards and acknowledgement.
N
Disney had already been working with Pixar since 1991. It used
to look after the distribution of Pixar’s animated films. However,
in 2004, due to the differences with Disney’s then CEO Michael
Eisner, Pixar announced that it would partner with another dis-
tribution company. But the things changed as Robert Iger took
over from Eisner in 2005 and revitalised talks with Pixar. The talk
ended up in the successful acquisition of Pixar by Disney that
made Steve Jobs, the ex-CEO of Apple Computer Inc., the ma-
jor shareholder in Disney with an equity stake of around 7%. Not
only this, but Jobs had also become a member of Disney’s Board
of Directors.
As per the Disney’s press release, this acquisition combines Pix-

ar’s preeminent creative and technological resources with Disney’s
unparalleled portfolio of world-class family entertainment, charac-
ters, theme parks and other franchises, resulting in vast potential
for new landmark creative output and technological innovation that
can fuel future growth across Disney’s businesses.

Case study 4
n o t e s
Source: www.appliedfinancejulianshovlin.wordpress.com
Analysts said that the deal was more important to Disney than
to Pixar. The deal gave Disney the ownership of the world’s most
S
renowned computer animation studio and its talent. The merg-
er offered the necessary technology edge and direction to Dis-
ney. At that time, Disney was facing trouble as its own animation
IM
films were failing one after another. The deal provided Disney a
chance to get the necessary push in creativity. On several benefits
that Disney would derive, Nelson Gayton, Professor at Wharton
School of Business said, I believe that the acquisition of Pixar was
of utmost strategic importance to Disney, not only because of where
Disney’s previous distribution relationship with Pixar seemed
headed, but also because of Pixar’s potential value to Disney’s ‘fam-
M
ily entertainment’ brand and assets, like theme parks and televi-
sion, that feed off this brand.
Overall, it was highly successful deal for both the companies as

the duo together resulted in some of the highest grossing films
N
of all time. ‘Cars’ in 2006, ‘Ratatouille’ in 2007, ‘Wall-E’ in 2008,

‘Up’ in 2009, ‘Toy Story 3’ in 2010, ‘Cars 2’ in 2011, ‘Brave’ in 2012,
‘Monsters University’ in 2013, ‘The good Dinosaur’ in 2015, ‘Find-
ing Dory’ in 2016 and ‘Cars 3’ in 2017 are the examples of films
produced under the Disney-Pixar collaboration.
Source: www.uk.movies.yahoo.com

Case study 4: DISNEY’S PIXAR ACQUISITION 295
Case study 4
n o t e s
The basic reason behind the success of the merger was that it
turned out to be a win-win deal for both the parties. On one hand,
the deal helped Disney to get access to the animating expertise of
Pixar and produce more hit creations. On the other hand, Pixar
got the advantage of using the vast network of Disney for captur-
ing the untapped market. Disney, after all is the world’s largest
entertainment company. It owns television networks; film studio;
theme parks and consumer products businesses; and all of these
could help Pixar in gaining maximum profit.
Pixar, in order to preserve its culture, created a list of things that

would not be changed as a result of the merger. For example, Pix-
ar employees do not sign employment contracts. At Pixar, it is be-
lieved that We have never had to go back and look at it. Everything
they’ve said they would do they have lived up to. Iger ensured that
S
Pixar employees get mixed in the new environment. Disney and
Pixar, even after the merger, continued to work from their sepa-
rate headquarters at Burbank and Emeryville respectively. Iger
not only allowed the Pixar name to remain but also never changed
IM
employees’ email addresses. In other words, Disney allowed Pixar
to maintain its own identity within the enlarged group. Howev-
er, in turn, Iger involved Pixar employees in tasks that could in-
crease the efficiency of Disney. Before the merger, Pixar used to
release only one film a year. Not only this, but it also used to stay
away from the idea of sequels as it believed that sequels destroy
M
the creative process. However, after the merger, the work-process

at Pixar started changing and within a couple of years, Pixar’s ex-
ecutives started sanctioning the release of sequels and more than
one film each year.
N
questions
1. With reference to the given case study, explain the

significance of merger and acquisition.
(Hint: Mergers and acquisitions have become popular
strategies in the last few decades to expand the scope
of business for an organisation. The strategy helps
organisations to pool their resources together to gain a
competitive advantage.)
2. Was Disney-Pixar merger good or bad? Give reasons as
per your understanding.
(Hint: It was definitely a good merger as it turned out
to be a win-win deal for both the parties. On one hand,
the deal helped Disney to get access to the animating
expertise of Pixar and produce more hit creations. On
the other hand, Pixar got the advantage of using the vast
network of Disney for capturing the untapped market.)

Case study 5
n o t e s
COST LEADERSHIP STRATEGY OF VIRGIN AUSTRALIA

AIRLINES PTY. LTD.
This Case Study discusses the significance of applying a cost lead-

ership strategy in an organisation. It is with respect to Chapter 4 of
the book.
S
IM
Source: www.airlinersgallery.smugmug.com
Virgin Australia Airlines Pty. Ltd. (previously known as Virgin

Blue Airlines Pvt. Ltd.) is the second largest airline in Australia.
M
Based in Queensland, Australia, the airline was founded in 2000

by the Virgin Group of Sir Richard Branson. Initially, the airline
was operating in a single route with just two aircraft. However,
within a period of just one year, Virgin Australia Airlines became
N
the second largest airline in Australia.
Virgin Australia evolved as a highly integrated air services pro-

vider, with a wide-ranging domestic network and two global sub-
sidiary/joint ventures, namely Pacific Blue and Polynesian Blue.
When the Virgin Australia Airlines entered into the market as Vir-
gin Blue, Qantas and Ansett were the two major competitors that
dominated the Australian market.
However, with the collapse of Ansett in September 2001, Virgin

Australia and Qantas were the only two major competitors left in
the market. Departure of Ansett, offered Virgin to grow rapidly by
expanding its route network. In 2006, Virgin developed its ‘New
World Carrier’ (NWC) strategy that focused on the two major
goals of maintaining cost leadership and targetting the fare lev-
els of competitive airlines, especially Qantas. As part of its ‘NWC’
strategy, Virgin ordered 20 Embraer regional jets (E-170s with 78
seats and E-190s with 104 seats) to improve its network and offer
better regularities to a wider domestic market.

Case study 5: COST LEADERSHIP STRATEGY OF VIRGIN AUSTRALIA AIRLINES PTY. LTD. 297
Case study 5
n o t e s
The airline introduced a series of value-added services that not

only helped it to fetch higher-paying passengers but also become
profit centre for Virgin Australia. For example, user-pay lounge
facilities, in-flight entertainment systems, sophisticated frequent
traveller programme, flexible corporate fares and other travel
solutions provide extra options to Virgin Australia to win high-val-
ue customers.
The higher yielding NWC strategy provided Virgin Australia a

number of benefits, such as offering airline services with a lower
cost base. The airline, in May, 2007 announced the launch of a
“super low cost” subsidiary (carrier B737s) to offer “extremely”
cheap fares on domestic operations. It was the world’s first low
cost subsidiary of a low cost airline
S
The main reason behind the success of the airline is its cost lead-
ership strategy. Virgin Australia Airline adopted the cost leader-
ship strategy by using the following measures:
IM
Eliminating different costs: To become a low-cost service
provider, Virgin focused on minimising various costs, such as
printed ticketing cost and cost of in-flight meals. This helped
the company to offer cheaper fares to its passengers as com-
pared to its competitors.
Using the Internet as a channel for airline distribution: It
M
was one of the major factors that helped in eliminating the

cost to a large extent. Earlier, most of the airlines were forced
to rely on only one channel of distribution that was supported
by the travel agency industry. It used to be both, costly and
N
challenging for the airlines. However, the Internet changed

the entire situation as now airlines can simplify their reser-
vation procedures through this electronic medium. Internet
also helped Virgin Australia Airlines, in providing a route to
effective, speedy and cost-efficient distribution.
Regulatory liberalisation: It is another major factor that of-
fered airlines an opportunity to enter in new markets. With
this liberalisation policy, many countries, especially, Austraila
and Canada have significantly helped new airlines like Virgin
Australia to fulfil their ambitions. Regulated framework for
easy entry also helped the Virgin Australia to gain cost lead-
ership.
Point-to-point flying model: As compared to the hub-and-
spoke model used by other traditional carriers, Virgin Airlines
followed the strategy of point-to-point flying that helped the
organisation in reducing different costs such as baggage-han-
dling cost. This strategy offered a significant cost advantage to
Virgin over other airlines in Australia.

Case study 5
n o t e s
Operating only one type of aircraft: Virgin concentrated on

operating only one type of aircraft (Boeing 737) that could
provide the organisation with more flexibility in scheduling
crew members. This helped the organisation to minimise var-
ious costs such as aircraft acquisition cost, maintenance cost,
training cost of the crew and spare part costs.
Continuous improvement in employee productivity: Virgin
Australia Airlines also reduced labour costs by continuously
improving employee productivity. The employees were remu-
nerated on the basis of their productivity. This helped in re-
ducing the overall cost to the airlines.
Considerably low fares of Virgin Australia Airlines attracted many

passengers, who otherwise availed other modes of transportation,
S
such as bus, train or personal cars. It also offered seats on a one-
way basis, and 75 percent of the seats in aircraft were offered for
the minimum fare assigned for a particular route. These unique
cost-cutting measures along with a very competitive workforce
IM
made Virgin Australia Airlines a very competitive airline in the
world.
questions
1. With respect to the case study, explain the concept of cost

M
leadership.
(Hint: Cost leadership refers to the generic strategy in
which an organisation delivers its products or services at
a lower cost than its competitors. Virgin Australia Airlines
N
offers cheaper fares to passengers as compared to other

airlines. The organisation achieved cost leadership by
eliminating different types of costs such as in-flight meal,
aircraft acquisition costs and operating costs.)
2. Explain in detail how Virgin Australia achieved cost
leadership?
(Hint: Virgin Australia achieved cost leadership by
eliminating the additional features or services and
concentrate more on the basic services, improving
employee’s productivity for achieving cost leadership,
etc.)

Case study 6
n o t e s
PROCESS PLANNING AT MCDONALD’S
This Case Study discusses how precise process planning helps Mc-
Donald’s to achieve operational excellence. It is with respect to
Chapter 5 of the book.
S
Source: ww.askmen.com
IM
ABOUT THE COMPANY
McDonald’s was founded in 1940 as a barbecue restaurant at San

Bernardino, California. It is an American hamburger and fast
food restaurant chain that was started by Richard and Maurice
McDonald. Using the production line principle, Richard and Mau-
M
rice McDonald, reorganised their business as a hamburger stand,

in 1948.
In 1953, using the arches logo, the first McDonald’s franchise

opened in Phoenix, Arizona. The company was subsequently pur-
N
chased by the businessman Ray Kroc who joined the company as

a franchise agent in 1955.
McDonald’s is considered to be the world’s largest restaurant

chain in the recent times, serving approximately 68 million cus-
tomers daily across 120 countries. The company is known to have
approximately 36,900 outlets till 2016. The McDonald’s menu
generally contains hamburgers, chicken products, French fries,
breakfast items, wraps, cheeseburgers, soft drinks, milkshakes,
and desserts. The company has also added many items to its
menu that includes salads, smoothies, fish and fruit in response to
changing consumer tastes and after it was criticised for the serv-
ing a food of unhealthy nature.
In a McDonald’s model, restaurant is operated either by a fran-

chisee, an affiliate or the company itself. The source of revenue
for the corporation are the revenues generated from the rent, roy-
alty and fee received from the paid by the franchisees, and sales
from the company-operated restaurants.

Case study 6
n o t e s
As per a BBC report published in 2012, McDonald’s was posi-

tioned as the world’s second largest private employer second to
Walmart with nearly 1.9 million employees, with 1.5 million em-
ployed by the franchises. Currently headquartered at Oak Brook,
Illinois, McDonald’s plans to relocate its global headquarters
to Chicago by early 2018.
MCDONALD’S PROCESS PLANNING
McDonald’s is considered to have the best processes and systems

that leave nothing unplanned. From operations, purchasing, fi-
nance, sales and marketing to product innovation, all activities
take place as a part of precise process planning. Even though
their food menu is not rated five star, the business processes, their
operation and business strategy is definitely considered to be of
S
a five star level by experts. High level policies regarding process
planning and implementation seem to have contributed largely to
the company’s success.
IM
Though the front face of a McDonald’s outlet may be just some
burger chute, drink dispensers, fries bank and a couple of oth-
er things along with an impeccably friendly service suggestive of
some very slick selling techniques, the secret to McDonald’s is
actually what goes on backstage.
A very noticeable activity in McDonald’s outlets is burger chutes

M
generally placed behind order counters where burgers are dis-

pensed from the kitchen. The important aspect here is that the
making of the burgers follows a standard operating protocol and
are then dispensed in the chutes. The chutes are designated for
N
McDonald’s ‘Runner’ products i.e. the products that are predict-

able in high frequency and volume. Usually, runner products are
Big Mac, Quarter Pounder, hamburger, etc. The company has in-
corporated its high level policy of operational excellence in the
way runner products are produced with absolute precision.
Source: retail.franchiseindia.com

Case study 6: PROCESS PLANNING AT MCDONALD’S 301
Case study 6
n o t e s
It is believed that the management of runner products contrib-

utes largely to McDonald’s profits. Since McDonald’s focuses on
high volume precision so every employee behind the chute is
trained on McDonald’s specific way of making products as per
their protocols. Hence managers are aware of the hourly output
per employee. As the business depends on the successful execu-
tion of the processes, the company seems to have ingrained it in
their employees.
S
IM
Source: http://mcdonaldsblog.in
M
Another strategic feature of process planning is that, in the chute,

a burger is made in advance and placed in buffer in the front end
of the chute that helps to fulfill customer requirements. As a re-
sult, the customer does not have to wait for his/her order for long.
N
Responsive process planning has helped McDonald’s in:

Enhancing service delivery by immediately addressing cus-
tomer requirements. This further helps in achieving a positive
customer experience.
Acting as an indication of a gap for backend operators, that
they need to fill. Thus, it also helps in controlled production,
preventing wastage and achieving operational excellence.
OPERATIONAL EXCELLENCE IN THE BURGER MAKING

PROCESS
The burgers at McDonald’s restaurants are prepared by two peo-

ple, splitting the process in two halves. This is to ensure that the
gap in the burger chute gets filled as soon as possible. The pack-
aging of the burger is done by a third person, making it similar to
an assembly line in manufacturing. The process further enhances
operational excellence and quality adherence.

Case study 6
n o t e s
In a case where there is a deviation from their regular require-

ments, for example a customer asking for a regular hamburger
without gherkins, the requirement would be placed under the
category of a “stranger product”. Such products are considered
as unimportant for their operational efficiency policy that shall
not follow the chute process. In such cases, the focus is on service
delivery instead, where the customer is asked to wait while the
order is prepared and it is delivered at the customer’s seat. The
point here is that a balance is maintained by increasing efficiency
in another standard if one of the standards gets compromised.
This does indicate an increase in the cots but the same gets ab-
sorbed due to the relative smaller percentage of such require-
ments.
Another factor that has contributed to the success of McDon-
S
ald’s is their stringent hygiene standards. The outlets never com-
promise on these standards that they feel are important to their
service delivery policy. McDonald’s has been able to sustain its
IM
business practices with huge efforts in their product research and
sales and marketing processes.
FOCUS ON HIGH QUALITY SERVICE DELIVERY PROCESS
Apart from making products in a precise process format, the ser-

vice delivery process is also managed in a manner that helps Mc-
M
Donald’s in achieving high service quality and customer satisfac-

tion. The total waiting time gets split between queuing time and
service delivery time. Once a customer has made the payment,
they are asked to move to the side lane while their order gets pre-
N
pared, so that the next customer’s order can be taken. This gives
a perception of continuity and flow to the customer, even though
the total service time remains the same. Another advantage of this
process is that it reduces idle time at the billing counter thereby,
decreasing the number of counters and staff requirements. This
helps in improving the effectiveness of the overall process.
At the time of order preparation, a printed copy of the order is

attached on the tray that serves as a checklist for the attending
staff to ensure 100% accuracy in order delivery thereby adhering
to the principles of “right first time, right every time”. This is in
conformance to their quality policy.
CONCLUSION
A well-planned and well-executed process planning is the main

ingredient behind the success of McDonald’s. The company has

Case study 6: PROCESS PLANNING AT MCDONALD’S 303
Case study 6
n o t e s
involved certain best practices in its operational processes that

have helped it in:
decreasing labour cost
decreasing idle time at order counters
maintaining continuous order processing
increasing productivity
eliminating wastage on all fronts
providing high service delivery experience to customers
maintaining consistent customer experience across all restau-
rants
adhering to standard operating protocols to ensure consisten-
S
cy, leading to high quality processes.
questions
IM
1. With reference to the given case study, discuss why
process planning is important factor for the success of
organisations like McDonald’s?
(Hint: The concept of a process lays emphasis on the
point that every process of an organisation or any of its
M
departments should be well-defined, monitored and

controlled with right inputs. This would ultimately help
in producing high-quality output. Planning of a process
requires optimisation and integration of cross-functional
activities that make up a work or functioning style of an
N
organisation.)
2. Discuss major challenges that McDonald’s (as a service
organisation) could face in managing its service processes.
(Hint: As a service organisation, McDonald’s service
processes include all those activities that are designed to
provide services as per customer satisfaction. Managing
service processes is a complex and difficult task. This is
due to the fact that service-oriented business deals with
the majority of intangible things and being intangible, it
is subjected to individual preferences. Thus, the success
of service processes at McDonald’s largely depends on a
continuous and standard delivery of services. Only this
could result in customer satisfaction.)

Case study 7
n o t e s
CAPACITY EXPANSION AT AMUL
This Case Study discusses how Amul is expanding its processing

capacity to meet the growing demand of the customers. It is with
respect to Chapter 6 of the book.
S
IM
Source: http://sumul.com
ABOUT THE COMPANY
Amul was born as a result of a protest by farmers to stop exploita-

tion by middlemen in 1946. This milk movement was inspired by
M
India’s freedom movement for independence from the British

rule. The movement originated from Anand, a small town in the
state of Gujarat in western India.
The trade practices of the local cartel to exploit local farmers

N
angered them and they decided to get rid of this unfair and ma-
nipulative practice. Sardar Vallabhbhai Patel was approached by
farmers for a solution, who suggested that the farmers get rid of
middlemen and form their own co-operative. It was recommend-
ed that the cooperative so formed shall have the procurement,
processing and marketing verticals under their control. The local
farmers of Anand went on a strike and refused milk sales and
under guidance of leaders like Sardar Patel, Morarji Desai and
Tribhuvandas Patel, Amul was formed as cooperative in 1946.
At that time, the co-operative was named as Kaira District Co-op-

erative Milk Producers Union Ltd. commenced with two village
dairy co-operative societies and daily production capacity of 247
litres of milk. Today, this co-operative is known as Amul Dairy.
Under the able leadership of Tribhuvandas Patel, the founder
Chairman and Dr Verghese Kurien, Amul soon became India’s
largest milk co-operative. The success of Amul is attributed to a
few important factors, which are:
The farmers were the process owners.

Case study 7: CAPACITY EXPANSION AT AMUL 305
Case study 7
n o t e s
The elected representatives of the farmers also managed vil-

lage societies and the district union.
The co-operative hired professionals to operate and run the
business of the dairy.
The co-operatives were not only sensitive to the needs, but
also responsive to the demands of the farmers.
S
IM
Source: http://www.panoramio.com
CAPACITY EXPANSION AND AMUL’S GROWTH

M
In the financial year 2013-14, the Gujarat Cooperative Milk Mar-

keting Federation (GCMMF) registered its highest ever growth of
32 per cent since its inception. The turnover in that year crossed
`18,000 crores. As per the federation, the new dairy projects that
N
are proposed to be added across the country, would expand the

existing processing capacity to more than 38 million litres per day.
According to GCMMF managing director RS Sodhi, There has

been rise in milk demand across the country and therefore, we are
planning to raise our milk processing capacity by another 10 million
litres per day from current capacity of 28.1 million litres per day
(mltpd). The cooperative is looking to raise the capacity by 2020,
which will require an investment of about Rs 2,500 crore. As of now,
we are looking to establish one plant each for milk processing in
Kolkata and Mumbai and two more plants in Gujarat. Besides this,
we have plans to raise the capacity in few existing plants.
Today, the cooperative has about 60 various processing plants, of

which 40 are in Gujarat only. Around 50 per cent of Amul’s turn-
over comes from milk sale only. However, the cooperative is also
focusing on expanding its production capacity of value-added
products like cheese by three times from 40 tonnes to 120 tonnes
per day, as it is facing high rise in demand.

Case study 7
n o t e s
S
Source: http://www.thehindubusinessline.com
According to Sodhi, In the last six years, the dairy cooperative’s

turnover has jumped nearly three-fold to Rs 23,000 crore and is aim-
IM
ing to more than double it to Rs 50,000 crore by 2020. To reach the
goal, GCMMF has established milk processing plants in Haryana,
Uttar Pradesh, Maharashtra, Madhya Pradesh, West Bengal and
Rajasthan and is also procuring milk from other states.
questions
M
1. With reference to the given case study, discuss the major

factor responsible for processing capacity expansion of
Amul.
(Hint: High growth in demand for dairy products.)
N
2. Discuss possible challenges that Amul may face while

working on its capacity expansion plans.
(Hint: Increasing milk prices, limited resources, expensive
land rates, etc.)

Case study 8
n o t e s
A&R LOGISTICS – BUILDING 3PL SERVICE FROM

A DRY BULK TRANSPORT BASE
This Case Study discusses how third-party logistics (3PL) service is

performed by A&R Logistics, Inc. It is with respect to Chapter 7 of
the book.
S
IM
Source: http://www.ccjdigital.com
A&R Logistics, Inc. is a leading provider of dry bulk transpor-

tation services, warehousing & packaging, distribution, and
M
third-party logistics solutions to a number of multinational com-

panies within the chemical and plastic industries. The logistics
company is growing fast to accommodate the massive expansion
in the US manufacturing sector.
N
At the time of its inception in 1969, A&R Logistics had only two
trucks to transport resin materials from and to Lyondell Basell’s
Equistar petrochemical factory. Over a period of time, its fleet
grew to over 810 tractors, and 1.3 million square feet of the area
was covered by its warehouses and terminals across the country.
The company is basically known for its transportation services.
The warehousing and brokerage of A&R contributed to around
30% of its total business. With the expansion of its 3PL business,
A&R is today one of the leading providers of transportation for
plastic and dry flowable materials.
The main customers of this company include Exxon Mobil, Po-

ly-One, Chevron Phillips and Total Group. The Transport division
of A&R has a capacity of 1070 dry bulk trailers, 1000 non-pres-
surised intermodal containers and 150 pressurised vessels. The
company has implemented a 1500 cubic feet aluminium ves-
sel that eliminates the need for disposable liners and speeds up
the loading/unloading process—thus appropriately named Elim-
inator.

Case study 8
n o t e s
Handling bulk materials is an asset-intensive business of A&R. It

requires a large network of truck terminals and warehouses hav-
ing direct access to railways and loading equipment. Distribution
operations are important in supporting this business. These in-
clude transportation from rail hopper cars to bulk hopper trucks,
storage in on-site rail cars, containers and warehouses, etc. It also
includes managing inventory of raw and packaged goods by the
date and lot number. A&R’s packaging and distribution division
has ten warehouses available to it round the clock. Their details
are given as follows:
S
IM
M
Source: http://www.3plogistics.com/AR_7-2011_files/image013.gif
In Morris warehouse, the silos are placed next to rail sidings. This
warehouse stores plastic resin pellets. The containers are inven-
toried using a system that tracks their dates and lot numbers.
N
Having access to railways is of key importance for bulk materials.

90% of the business of A&R relates to deliveries via rail and trans-
port of pellets by trucks. On an average, 3PL does 125 rail-to-bulk
transfers daily.
With the advent of globalisation, A&R wished to streamline its

operations and prepare for further growth. In 1997, the Integrat-
ed Logistics Services was added for domestic transport manage-
ment. By 2010, the gross revenue grew to USD 53 million. The
core services consisted transport management, tracking services,
trans-loading, commodity freight brokerage, terminal manage-
ment services and silo evacuations.
A&R combined the capacities across its divisions and offered

an integrated 3PL portfolio. The Global Logistics (GL) division
was envisaged to complement the Transport division that was
asset-intensive. GL carriers included flatbeds, reefers, Truckload
(TL) and Less-Than Truckload (LTL). 10% of the total 3000 carri-
ers are under contract. 46 of these are dry bulk carriers. As an ini-

Case study 8: A&R LOGISTICS – BUILDING 3PL SERVICE FROM A DRY BULK TRANSPORT BASE 309
Case study 8
n o t e s
tiative to measure the performance of its partners, it tracks data

on Federal Motor Carrier Safety Administration, and out of ser-
vice violations and accidents. The GL division performs services
such as procurement of carriers, managing them, planning ship-
ments, tracking, dispatching, processing claims if any and freight
bill payment, among others.
A&R strives to gain a deep understanding of its clients. It is now

ramping up its operations in freight broking business by engag-
ing in general commodities. Its effective use of IT, especially the
MercuryGate TMS solution, has helped it to become poised for
the next level of growth. In 2010, GL was successful with 30,600
shipments, of which 98.93% were on-time deliveries. This result-
ed in a very high rating on ‘customer complaint error-free’ ship-
S
ments. As an example, DOW is a major customer of A&R. 40% of
the dry bulk volume of DOW is shipped by A&R. The remainder
is shared among 46 other carriers. GL has delivered a 3% to 5%
of savings in a year by leveraging the shipment volume to gain
IM
favourable rates from dry bulk carriers and running empty miles
with planning.
The movement and loading data is fed into the database that is
able to give a status report for some of the late rail cars. The Just-
in-Time (JIT) delivery and reduction in inventory have made GL
a preferred value-add choice to bulk shippers. A&R has a heavy
M
asset base and a wide customer base in the resin industry. It in-
tends to grow its non-asset-based businesses.
questions
N
1. What strategies have A&R Logistics used for streamlining

operations?
(Hint: Use of technology, JIT delivery.)
2. In the bulk material transportation business, what aspect
is of key importance? Explain.
(Hint: Easy access to railways.)

Case study 9
n o t e s
IMPLEMENTATION OF LEAN PRODUCTION METHOD

BY JAGUAR
This Case Study discusses the implementation of the lean manufac-

turing process in the world’s most reputed automobile manufactur-
er. It is related to Chapter 7 of the book.
S
IM
Source: www.dirdoo.com
Jaguar, a multinational car operator, started its operations in 1922

by manufacturing motorcycle sidecars. The company was later
bought by the Ford Group in the year 1989. Meanwhile, anoth-
M
er car manufacturing giant, Land Rover, was bought by BMW in

1994. Land Rover later joined Jaguar under Ford in 2000 to share
their engineering knowledge and facilities. In the year 2008, the
two car manufacturing companies were acquired by Tata Motors,
N
India’s largest automobile manufacturer and joined together as

one organisation in 2013.
Jaguar has an international reputation for a culture of continuous

quality improvement. For achieving high quality and efficiency,
Jaguar stresses on reducing waste in production. In order to im-
plement a lean production system, Jaguar worked with a team of
consultants from another organisation, RWD Technology UK Ltd.
The first step for adopting the lean manufacturing system was
to change work relationship patterns. Earlier, Jaguar used a hi-
erarchical approach where a single supervisor and group leader
were responsible for 30 production line workers. In the new work
structure, the organisation agreed that a team leader would head
a small group of seven team members.
The earlier work relationship was based on the ‘tell and do’ ap-
proach. Instructions were given to subordinates to exercise con-
trol from the top-down approach. The new pattern allowed for
more opportunities of collective decision making. Under the new
system, line workers were expected to take responsibility for

Case study 9: IMPLEMENTATION OF LEAN PRODUCTION METHOD BY JAGUAR 311
Case study 9
n o t e s
their own work and depend on team leaders only for support. The
workers were asked to operate in small groups of seven headed by
a leader, an approach called cellular working. The teams (called
cells) were made familiarised with a series of new approaches,
developed to assist them in their work. The group members were
trained on site for a practical approach that would help them in
applying new tools in a work-based context. The line workers ac-
tively adopted the new work approach that promoted greater in-
volvement and responsibility. The result of the new approach was
increased productivity and quality of work.
The second step taken by the organisation for achieving the lean
production line was to develop a continuous flow system of manu-
facturing based on the ‘just-in-time’ approach. Earlier, employees
S
focused on the already determined processes of production using
batches of car components. The work area was messed up with
batches of these car components resulting in a confined work en-
vironment with a lack of space.
IM
M
N
Source: www.adandp.media
The new approach was based on reducing the stock of car com-
ponents in the workspace to the exact amount that would keep
the production to continue smoothly. The line workers dropped
signals using an alarm to order fresh stocks as and when needed.
A prompt response from the central storing unit was supplied to
the work stations ‘just-in-time’ to continue with the production.
This resulted in the following benefits:
Reduced floor space for components
Allowed spacious area for workers
Decreased unwanted movements between operations
Reduced damage caused to the components lying on the floor

Case study 9
n o t e s
Another step to adopt lean production at Jaguar was to match its

supply of new cars at Castle Bromwich (manufacturing unit in
Birmingham) to the demand from customers. When production
managers were provided with the actual demand for cars in the
market on a weekly basis, they could easily calculate components
required and the exact number of cars that are needed to be pro-
duced in a given week. If the organisation manufactured lesser
cars, it would fail to meet the demand; and in case it manufac-
tured too many cars, it could result in a waste of inventory. Thus,
the solution to match the demand with the supply helped produc-
tion line maintain quality and avoid any wastage of inventory.
questions
S
1. What were the wastes that Jaguar could eliminate
after adopting the lean production method at its Castle
Bromwich manufacturing unit in Birmingham?
IM
(Hint: Dependence of workers, space constraints at work
stations, rising inventory, etc.)
2. What are the main features of the Jaguar’s new lean
production system?
(Hint: Cellular working, Just-in-Time inventory, demand-
supply equilibrium, etc.)
M
N

Case study 10
n o t e s
POSTPONEMENT STRATEGY FOLLOWED BY LONG

GROVE CONFECTIONERY CO.
This Case Study discusses how Long Grove Confectionery Co. de-
vised its postponement strategy to deal with the leftover inventory
problem. It is with respect to Chapter 8 of the book.
S
IM
Source: www.roadtrippers.com
Long Grove Confectionery Co. (LGCC) is a US-based local con-

fectionery manufacturer. It is located in Illinois, US. It manufac-
tures premium high-end chocolates. This case is regarding the
M
postponement strategy sought by LGCC in the late 1990s when

most of their products were sold through the wholesale network
by the use of catalogues. However, the remaining products were
also sold in the company’s own stores. The company offered a lot
of product variants which led to the development of certain unfa-
N
vourable situations for the company and also affected its financial
performance and revenues.
One such situation occurred when a good amount of packaging

material inventory (that was purchased for seasonal products)
was left unused and it needed to be discarded by the company
(in ideal situation). However, the second such situation occurred
when the company did not discard packaging immediately and
carried it over for use in the next season for packing similar prod-
ucts. This led to a problem for the marketing department as it will
have to sell similar products it sold last year. In such a situation,
the company was forced to minimise the cost impact of leftover
inventory to reduce the impact on profits.
The company analysed its situation and found that the root cause
of their problem was that it was not able to predict the demand
for new products efficiently and accurately. The variance related
to a particular product’s demand can fluctuate either on the high-
er side or on the lower side. The fluctuation can be on the higher

Case study 10
n o t e s
side (demand for more products than forecasted) if a big whole-

saler decides to retail the product all over the country. However,
fluctuation can be on the lower side (demand for less products
than forecasted) if the product is not able to attract much cus-
tomers. It means that the major problem of LGCC was related
to matching the demand and supply quantities. Another prob-
lem was that LGCC was not able to obtain quantity discounts as
it did not place huge orders. Due to this, LGCC’s profit margin
was reduced. Now, here the company was faced with a vicious
cycle, if it placed large orders for packaging material, it would get
quantity discounts; however, if the actual sales are lower than the
forecasts, it will again have to bear the cost of unused inventory
(and disposal costs) that it again would carry over to next season.
Another problem with LGCC was that it used very special kind of
S
packaging for its products which added to its product’s unique-
ness. If the demand was less than expected, the packaging inven-
tory would lie idle with no alternative use whereas if the demand
exceeded forecast, additional inventory must be acquired in small
IM
lots. Consequently, profits were lowered and costs increased due
to excess inventory holding costs and disposal costs (that arise as
a result of discarding the unused packaging material).
LGCC wanted to resolve all these problems by improving its fore-

casting practice. However, the management of the company was
M
changed recently and the company had the same old informa-
tion systems. Therefore, it was difficult to resolve this problem in
short term. The new management wanted to introduce some new
products for which the forecasts of demand and sales were highly
unpredictable (being new). The management decided to reduce
N
inventory holding costs and disposal costs. Most of the sales for
LGCC’s wholesale business are generated by the use of catalogue.
However, the catalogue includes both hot selling products as well
as the slow selling products. The slow selling products are adver-
tised in the catalogue so as to use the excess inventory from last
year; these products are often advertised as on sale products in
catalogue. It means that these slow sellers occupy the scarce and
costly catalogue space which should be given to new products and
increase focus on hot sellers.
All problems were piling up and the management decided that it

needs to develop a postponement plan in order to delay differenti-
ation of products to the later stages of the supply chain. The man-
agement analysed the possibility of modifying packaging designs
of products in such a way that different products could be pack-
aged using standard packaging material while at the same time
they maintain a unique, premium and distinctive appearance.
Earlier, LGCC used specially designed boxes that had decorative

Case study 10: POSTPONEMENT STRATEGY FOLLOWED BY LONG GROVE CONFECTIONERY CO. 315
Case study 10
n o t e s
features over it. However, after the decision of management to

modify packaging, LGCC started using standard boxes along with
specially designed wrappers, bows, coverings etc., which could be
used with standard boxes to produce similar experience as before.
As a result of this, differentiation in packaging was shifted to the

later stage in the process. The company was also able to forecast
demand and sales more accurately. And lastly, the unused inven-
tory could be applied to other products. The safety stock require-
ment was reduced drastically which lowered costs as the packag-
ing inventory was now common for all products. LGCC was also
able to receive quantity discounts because now it could order in
large quantities which led to cost reduction and increase in rev-
enue.
S
(Source:Adapted from, (2015). Retrieved 10 December 2015, from http://www.kellogg.
northwestern.edu/course/opns430/modules/supply_chain_management/postpone-
ment-august141998.pdf)
questions
IM
1. What was the main problem of LGCC and its cause?
(Hint: The problem of LGCC was related to unused
inventory and the associated disposal and carrying costs.
The root cause of the problem was that it was not able
to predict the demand for new products efficiently and
M
accurately.)
2. How did LGCC solve its problem and increase its profits?
(Hint: By postponing the point of differentiation in
N
packaging to the later stage in the manufacturing process.)

Case study 11
n o t e s
IMPLEMENTATION OF THE SCOR MODEL BY

EXPRESSPOINT
This Case Study discusses the implementation of the SCOR model

by ExpressPoint in order to enhance its supply chain and achieve
its organisational objectives. It is with respect to Chapter 9 of the
book.
S
Source: www.zoominfo.com
IM
ExpressPoint Technology Services is a company that provides
supply chain and high quality repair solutions to equipment man-
ufacturers and third-party logistics providers. The company’s
leadership team is aware of the fact that collaboration, undergo-
ing continuous improvement and flexibility in conducting busi-
ness are essential for satisfying customers. The company’s main
business goal is to make on-time delivery of products and services
M
to customers along with high quality and at relatively economical

costs. For this, the leadership team has to strategically analyse
and enhance the company’s supply chain processes.
N
The organization structure had become disjointed, explains Susan

Buttner, the Director of Finance at ExpressPoint. Through em-
ployee attrition, responsibilities were assigned to others who lacked
expertise with supply chain strategy. Departments became siloed
and vertical-thinking, focusing on their specific tasks rather than
the holistic, end-to-end supply chain.
ExpressPoint executives designed a three-year strategy to imple-

ment changes in separate phases. They also wanted to balance in-
dustry cost and improve service, quality and reporting standards.
In order to achieve these objectives, executives selected the Sup-
ply Chain Operations Reference (SCOR) model.
These tools were chosen because they demonstrate a proven ap-

proach, says Kelly Dudek, Chief Operating Officer at Expres-
sPoint. In addition, they teach employees to carry out day-to-day
principles, the technique demands team ownership, and SCOR is a
cross-industry standard.

Case study 11: IMPLEMENTATION OF THE SCOR MODEL BY EXPRESSPOINT 317
Case study 11
n o t e s
ExpressPoint’s team members employed SCOR metric defini-

tions in order to define their scorecard. They also collected a set
of sample data and decided the baseline data over a fiscal year.
In order to determine and analyse metric failures, lean and Six
Sigma training was employed. This helped to uncover faults that
were the reason behind the failure of metrics. In the meantime,
SCORmark, which is a benchmark survey, was completed. This
helped to furnish a statistical evaluation of ExpressPoint with re-
spect to comparable businesses.
A SCOR process maturity map was developed by ExpressPoint’s

executives that rated and outlined activities as broken or missing,
which were in the need of improvement or were working effec-
tively. This analysis helped to establish certain measures for iden-
tifying strategic process steps and system transactions. The team
S
discovered that the company’s planning processes and system
capabilities were not fully integrated and several of them were
either broken or missing.
IM
In present times, ExpressPoint is reaping benefits by having
a more comprehensive understanding of its supply chain. The
SCOR model helped us better understand our supply chain and the
competitive requirements, Buttner says. Refining our metrics gives
us increased visibility and helps balance our customers’ require-
ments with our financial objectives.
M
questions
1. Mention objectives that ExpressPoint’s executives wanted

N
to achieve by implementing the SCOR model.

(Hint: Balanced industry cost, improved customer service,
high-quality of products and services and compliance
with reporting standards.)
2. How did the SCOR model help ExpressPoint in integrating
its supply chain?
(Hint: Understanding the supply chain process
and competitive requirements, aligning customers’
requirements with financial objectives, etc.)

Case study 12
n o t e s
SUPPLY CHAIN OPTIMISATION THROUGH APPLICATION OF

DATA ANALYTICS
This Case Study discusses major tools and techniques used in sup-
ply chain optimisation. It is with respect to Chapter 10 of the book.
S
IM
Source: www.happiestminds.com
When it comes to supply chain optimisation, planning is the most

difficult stage that bears maximum impact on the cost because
M
of the Bullwhip Effect. It has been observed in many organisa-

tions that data analytics can have significant impact on accurate
planning, which in turn, helps organisations to deliver the right
product in the right amount at the right time. Techniques, such as
N
advanced algorithms and machine learning, improve forecast ac-

curacy across SKUs of the organisation. This results in less waste,
less inventory and fewer stockouts, which in turn, lead to higher
Earnings before Interest, Taxes, Depreciation and Amortization
(EBITDA), lower working capital requirements and greater com-
petitiveness.
A supply chain plays a crucial role in driving a competitive ad-

vantage and a dynamic global business environment. Today, in-
creased volatility in the market, continuous changes in customer
buying patterns, emergence of new markets, etc. make it difficult
for managers to decide the areas of focus. Advanced analytics can
help organisations in predicting patterns in customer preferences
and major economic trends. This information helps organisations
in creating a more efficient and responsive supply chain strategy.
Analytics can help in better forecasting and demand planning

with the help of data collected from point-of-sale (POS), usage
information, etc. Accurate prediction of customers’ needs helps

Case study 12: SUPPLY CHAIN OPTIMISATION THROUGH APPLICATION OF DATA ANALYTICS 319
Case study 12
n o t e s
in deciding the inventory level at different stages of the supply

chain. Data analytics also helps in devising strategies to improve
quality. Moreover, using analytics on supplier spends can help
in rationalising the supplier base and leveraging the economy of
scale. Analytics can also be applied for measuring product profit-
ability, optimising working capital requirements and reducing the
inventory level.
questions
1. What do you understand by the optimisation of the

supply chain? How do data analytics enable managers to
optimise supply chain strategies?
(Hint: Optimisation of supply chain involves extensive
S
application of mathematical models and computer
software to determine the optimal inventory level and
minimise supply chain cost. Data analytics help in pattern
recognition, accurate forecasting, information sharing,
IM
etc. and thereby, enabling managers to optimise supply
chain strategies.)
2. How can analytics help in building a responsive supply
chain?
(Hint: Analysis of customer feedback, study of production
M
processes, etc. enable supply chains to respond more

efficiently to demand fluctuations.)
N

N
M
IM
S

Operations and Supply Chain Strategies

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Operations and Supply Chain Strategies

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Operations and Supply Chain Strategies

Chief Academic Officer Content Reviewer

TOC Reviewer TOC Reviewer

Author: Arpita Singh

NMIMS Global Access - School for Continuing Education

CHAPTER NO. CHAPTER NAME PAGE NO.

1 Introduction to Operations Strategy 1

2 Designing Operations Strategy 41

3 Formulating Corporate-Level Strategy 75

5 Process Planning and Improvement 149

7 Introduction to Supply Chain Strategies 197

8 Supply Chain Restructuring 223

9 Metrics and Drivers of Supply Chain 243

Supply Chain Strategies and

11 Case Studies 281

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Introduction: What is operations strategy, Aims of operations strategy, Contents of an operations

ogy, Automation in manufacturing, Automation in services, Process improvement, Approach to

Strategic Capacity Management: Capacity management in operations, Capacity planning con-

NMIMS Global Access - School for Continuing Education

INTRODUCTION TO OPERATIONS STRATEGY

1.3.2 Contents of Operations Strategy

1.4 Operations Competitive Dimensions

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HOW HARLEY-DAVIDSON SWOTTED ITS OPERATIONS

being, ‘Indian Motorcycle Manufacturing Company’.

Harley-Davidson had fallen to the brink of bankruptcy in the ear-

ly 1980s. This was due to various factors, such as increased com-

In 1981, a group of executives, led by the then Chief Executive Of-

NMIMS Global Access - School for Continuing Education

IMPROVING QUALITY BY MIMICKING JAPANESE

Harley-Davidson had been affected by a continual lack of quality

In comparison, the Japanese motorcycle companies had suffered

The company discovered a solution in Japanese factories. Har-

plant in Ohio in 1982. They were astonished to see a well-ordered

facility while Harley-Davidson had recently invested in expen-

IMPLEMENTATION OF NEW OPERATIONS STRATEGY

Harley had started a pilot programme based on Japanese prac-

NMIMS Global Access - School for Continuing Education

critical in removing assembly-line bottlenecks. Harley-Davidson

Harley registered the following improvements as a result of revis-

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After studying this chapter, you will be able to:

In an organisation, the operations function is concerned with getting

constitute the long-term strategic direction of the organisation. There-

In operations strategy, the key operations decisions are made in accor-

dance with the overall strategic objectives of an organisation. These

1.2 CONCEPT OF STRATEGY

NMIMS Global Access - School for Continuing Education

“People use “strategy” in several different ways, such as:

According to Kenneth Andrews, Corporate strategy is the pattern of

A strategy furnishes a platform for an organisation to better perform

and achieve a competitive edge. The concept of strategy can be made

NMIMS Global Access - School for Continuing Education

Every organisation needs to have a strategy in order to beat competi-

Corporate-level Business-level Functional-level

Let us discuss these levels as follows:

vative and pervasive in nature. It includes major decisions, such

 In what all businesses should the organisation enter?

 Should an organisation have strategic alliance with other or-

Concept of Strategic Business Units (SBUs)

Large organisations often divide their entire business into smaller

NMIMS Global Access - School for Continuing Education

are called Strategic Business Units (SBUs) of an organisation. Ac-

In what all businesses should the organisation enter?

Should an organisation have strategic alliance with other or-

Business-level strategy: The business heads of each SBU design

accomplishing corporate-level strategies

How the strategy is going to be implemented?

Mass media, such as TV, radio or surveys published in news-

Achievable: An objective should be realistic, attainable and

Operational improvement and efficiency: Reduce costs and

Providing a wider product/service choice through flexible op-

Process technology: Process technology decisions are concerned

Work organisation: The decisions, taken in regard with work or-