Chapter 2 Operations Strategy and Competitiveness After completing the chapter, the students shall be able to: = Define operations strategy. = Describe the four-stage model of the strategic role of operations in an organization. } = Enumerate the four generic performance competitive dimensions that are particularly relevant to operations and supply chain activities. = Discuss the notion of trade-offs. = Compare order qualifiers from order winners. = Identify the four perspectives in Kaplan Norton generic map. = Name the different types of strategic fit. Operations management can “make or break” any business. The operations function is large and for most businesses and represents the bulk of the assets and the majority of the people. It also makes the business competitive by providing the ability to respond to customers and by developing the capabilities that will keep it ahead of its competitors in the future. OPERATIONS STRATEGY Operations strategy involves decisions that related to the specifications and design of the product or service, design of a production process and the infrastructure needed to stipport the process, the role of inventory in the process, and locating the process. Operations strategy decision is part of corporate planning process that coordinates the goals of operations with those of marketing and that of larger organization. Specifically, an operations strategy must include at least the following: Scanned with CamScanneramounts of capacity required by the organization to achieve its aims; the range and locations of facilities; . technology investment to supP0" Process and product developments; . formation of strategic buye'-Supplier relationships’ as part of the organization's :extended enterprise”; ._ the rate of new product or service introduction; P organizational structure - to reflect what the firm “does best”, often entailing outsourcing of othet activities. BENE aun Steven C. Wheelwright and Robert H. Hayes described four generic roles that manufacturing can play within a company, from a strategic perspective. While they specifically discuss the manufacturing function, the term operations can be substituted with no loss in relevance. These gerieric roles are labeled stages 1 to 4, as explained (See Table 1). Table 1 The'Four-Stage Model of the Strategic Role of Operations Internally Neutral | Operations maintain a reactive mode. Seeks only to minimize any negative impact that operations may have on the firm. The operations function is regarded as being incapable of influencing competitive success. Operations seek parity with competitors (neutrality) by following standard industry practices. They are likely to copy the prevailing best practices of its industry but never develop the same level of proficiency in their like the industry leaders. Operations’ contribution to the firm is dictated by the overall business strategy. However, operations have no input into the overall strategy. Firms formulate and pursue a formal operations strategy. They use their operation excellence as the basis for business strategy, hence called operations-based strategy. The operations of these firms are the head of developments in best practice. They set the industry standards in manners of customer satisfaction, thus enabling to gain customer loyalty and attract New ones. Externally Neutral Internally Supportive [Externally Supportive Stage 1 firms are said to be internally neutral, meaning that the operations function. is regarded as being incapable of influencing competitive success. Management, thereby, seeks only to minimize any negative impact that operations may have on the firm. Their operations performance objectives are continually changing between low cost, increased flexibility and improved quality. One might Cae Scanned with CamScannersay that operations maintain a reactive mode. When strategic issues involving operations arise, the firm usually calls in outside experts. Stage 2 firms are said to be externally neutral, meaning they seek parity with competitors (neutrality) by following standard industry practices. They are likely to copy the prevailing best practices of its industry like Just in Time (J!7), Total Quality Management (TQM) and Business Process Outsourcing (BPO) among others. They always adopt these techniques in the wake of industry leaders but by no means expected to have the same level of proficiency in their use. The combination of operations practices adopted may be considered an operation strategy due to its consistency. However, they cannot be still be overtly linked to business strategy due to inappropriateness. Capital investments in new equipment and facilities are seen as the most effective means of gaining competitive advantage. Stage 3 firms are labeled internally supportive, that is, operations’ contribution to the firm is dictated by the overall business strategy. These firms do formulate and pursue a formal operations strategy. This means that its operations performance objectives are aligned with, supportive of, its business objectives. This alignment and support provides that operations could offer the ways of achieving a competitive advantage. Adopting best practices in its operation, an organization could increase the chances of attaining competitive advantage. Stage 4 firms are at the most progressive stage of operations development. It is completely different among any of the other stages. These firms are said to be externally supportive. They use their operation excellence as the basis for business strategy, hence called operations-based strategy. These firms expect operations to make an important contribution to the competitive success of the organization. The operations of these firms are the head of developments in best practice. They set the industry standards in manners of customer satisfaction, thus enabling to gain customer loyalty and attract new ones. Firms under this stage should continually develop its operations because competitors will most likely imitate their operations-based competitiveness. They have to make the most of their existing resources and must learn to develop new capabilities to remain in this stage. Scanned with CamScanner‘Redetine industry expectations i Clearly the best & in the industry e 5 As ponds £ competitors i £ Holding the Organization back Source: Operations Management (2007) by Slack Figure 1 The Four-stage Model of Operations Contribution Since most firms have the bulk of their labor force and assets tied to the operations function; it makes sense for most firms to strive for a position in Stage 3 or Stage 4. Firms can, certainly, progress from one stage to the next with few, if any, hopping a stage. In reality, the majority of exceptional firms are in Stage 3, since Stage 4 is very hard to attain. Firms that fall short of fully taking advantage of the strategic power of operations will be hindered in their competitive abilities and vulnerable to attack from those competitors who do exploit their operations strategy. In order to do this effectively, operations must be involved throughout the whole of the business strategy. Corporate executives are inclined to presume that strategy has only to do with marketing initiatives. They inaccurately create the assumption that operation’s role is strictly to act in response to marketing changes rather than make inputs into them. In addition, corporate executives assume that operations have the flexibility to react positively to changing demands. : STRATEGIC OPERATION DIMENSIONS increasingly be toward strategy. . st Operations management's Tocus: msl fhe findashental organinedisee) Operations strategies must complement i! strategies via the following ways: Scanned with CamScanner1. Improved responsiveness in terms of: Minimizing time to respond . Timely response c. Accessibility through better locations, better raphical proximity, improved logistics and better systems of comtinucaben a y d. Wider product/service choice through flexible operations/manufacturing system, reduced throughput times, reduced cycle times, reduced set-up times, flexible manpower, better trained manpower, flexible machines and improved product designs and processing capabilities e. Increased proactivity fi oP 2. Reduced prices through: a. Overall improvements in the production-delivery value chain b. Better designs of products/services 3. Improved quality through: a. Better skills, better knowledge and better attitudinal orientation of all production and service providers Improved technology Reduced complexity and confusion Reduced problem generators aos Competitive Dimensions Competitiveness is necessary for companies to sell their goods and services in the marketplace. It is an important factor in determining the success or failure of an organization. Business firms often compete with its rivals in a number of ways. ‘There are five generic performance competitive dimensions thatare particularly relevant to operations and supply chain activities. They must be possessed by firms as operating advantages in order to outperform their competitors: 1. Quality is defined as the characteristics of a product or service that bear on its ability to satisfy stated or implied needs. An alternative definition is features and freedom from defects. a. Performance quality addresses the basic operating characteristics of the product or service. b. Conformance quality addresses whether the product was made or the service performed to specifications. c Reliability quality addresses whether a product will work for a long time without failing or requiring maintenance. at Ce Scanned with CamScanner5 Time refers to a number of diferent aspects of an organization's operations. a. Delivery speed refers to how quickly the operations or supply chain function can fulfill a need once it has been identified. b. Delivery reliability refers to the ability to deliver products or services when promised. c.. Delivery window is the acceptable time range in which deliveries can be made. 3, Flexibility considers how quickly operations and supply chains can respond to the unique needs of customers. a. Mix flexibility is the ability to produce a wide range of products or services, b. Changeover flexibility is the ability to provide a new product with minimal delay. c. Volume flexibility is the ability to produce whatever value the customer needs, 4. Cost refers to the ability to manufacture a product to a required cost. Typical cost management categories are labor, material, engineering and quality related costs Further, cost could also be failure costs, appraisal costs and prevention costs. 5. Product differentiation means any special features like design, cost, quality, ease of use, convenient location or warranty among others that causes a product or service to be perceived by the buyer as more suitable than the competitor's product or service. The Notion of Trade-Offs A sustainable strategic position needs trade-offs. A trade-off is the decision by a firm to accentuate one performance dimension over another, based on the recognition that superiority on some dimensions that may conflict with superiority on others. Firms must make trade-offs or decisions to highlight some dimensions at the expense of others. For instance, in making decision concerning the amount of inventory to stock, operations manager must take into consideration the trade-off between the increased level of customer service that the additional inventory yield and the increased costs required to stock that inventory. Likewise, in choosing a piece of equipment, a manager for operations must assess the qualities of extra features compared to the cost of those extra features. The employment of overtime to enhance output is another example, Here the operations manager must evaluate the value of increased output versus the increased costs of overtime such as lower productivity, higher costs of labor, lower quality and increased risks of accidents. ASOD a ; there are trade-offs with other A strategic position is not sustainable unless SSGHIDABIECaH 2 A ies are tible. Simpl tions. Trade-offs happens when activities ee Ply put; a pode-off ‘means that more of one thing necessitates less of another. An airline can " Scanned with CamScannerper year. Rapid restocking, moreover, red; i ‘ short model cycle, which eie weight wees tone ak arta peee In all three types of fit, the whole matters more than any individual part. Competitive advantage grows out of the entire system of auivitien. ‘The ft among activities substantially reduces cost oF increases differentiation. Beyond that, the competitive value of individual activities—or the associated skills, competencies, or resources—cannot be decoupled from the system or the strategy. Thus in competitive companies it can be misleading to explain success by specifying individual strengths, core competencies, or critical resources. The list of strengths cuts across many functions, and one strength blends into others. It is more useful to think in terms of themes that pervade many activities, such as low cost, a particular notion of customer service, or a particular conception of the value delivered. These themes are embodied in nests of tightly linked activities. Activity-System Maps Defined Activity-system maps, such as this one for Ikea (see Figure 3), show how a company’s strategic position is contained in a set of tailored activities designed to deliver it. In companies with a clear strategic position, a number of higher-order strategic themes (in black) can be identified and implemented through clusters of tightly linked activities (in gray). tte By Mars iyo iy /—~ f= bere Source: hbr.org/1996/11hohat-s-strategy Figure 3 Mapping Activity System of ikea BD Scanned with CamScannerFocusing on Core Capabilities In order to successfully put into practice an operations strategy, be it within a manufacturing firm or within a service, certain core capabilities must be recognized. These core capabilities let the firm to set up its competitive priorities in the marketplace. Core capabilities can thus be described as that skill or set of skills that the operations management function has developed that permits the firm to differentiate itself from its competitors. Similar core capabilities need to be identified in the other functional areas too, andl each of these functional capabilities should be aligned to meet the overall goals of the organization. In order to focus on these core capabilities, firms, both in manufacturing and services, have begun to dissociate themselves from those activities that are not considered being vital to their success. In manufacturing, more and more components and subassemblies that were formerly built in-house are now being subcontracted or outsourced to suppliers. As a consequence, the material cost in most manufacturing companies, as a percentage of total manufacturing costs, has significantly increased in recent years. On the other hand, the labor cost, as a percentage, has been significantly reduced, often to less than 5 percent of total costs. This focus ori core capabilities also has impacted services. More and more service operations are now subcontracting out supplementary support services that were formerly provided in-house. Once more, this strategy has allowed these services to focus on improving their core capabilities. For instance, some universities subcontract bookstore operations to retailers. In many instances, the companies that have subcontracted support services have revealed that the subcontractors can execute them better and at a lower cost than when they were done within. This focus on core capabilities further supports the concept of a value chain, Here each company focuses on its core capabilities, thereby permitting it to exploit its value contribution to the end product that is provided to the customer. Integration of Manufacturing and Services Many firms are currently looking to incorporated and user-friendly service as a means of obtaining a competitive advantage in the marketplace. In so doing they are recognizing the need to align and integrate the products that are being offered. This is true for both manufacturing and service operations. Xerox Canada, customarily a manufacturer of copiers and printers, at present callsitself the “document company.” Inordertoimprove their competitiveness, they have moved from providing only hardware to offering solutions that can improve the customer's processing of information, which involves a considerable value- added service aspect. As another illustration, SKF in Sweden no longer produces only ball bearings for its after-market or replacement business. It also provides advice to customers on spare parts management, training, and installation, and suggests good preventative maintenance practices that will extend the life of the bearings. Scanned with CamScanner‘These services can range from activities in the pre. post-purchase phases and even activities downstreser chase © Purchase Sel as distribution. Hendrix Voeders, traditionally a feed suport pip: farmers in Holland, now provides a wide range of services including consulting OF Pig breeding, nutritional management, and logistics. Coca-Cola has taken over some of the bottling and distribution of Coke products, downstream activities that were previously done by independent bottlers. Some manufacturers offer extefisive customer training to accompany the purchase of products. Customers become familiar with the products and learn to use them optimally. In addition this training can act as a competitive barrier. The Foxboro Company uses training to distance itself from the competition. Before its process control products are delivered, customers are invited to Foxboro’s manufacturing facility, where their equipment is set up and they learn how to use itunder the guidance of Foxboro instructors. This is one of the reasons Foxboro experiences a very high percentage of repeat business from existing customers. By integrating goods and services into a total package, or a “bundle of benefits” companies are better able to address the overall needs of their customers. ATTACKING THROUGH OPERATIONS Allthesesuccessful attacks were based primarily onthe kind of operations-based advantages. Indeed, that operations advantage was the key to the sustainability of the attacker's success. None were built around a new product or service, a unique technology, or a marketing or financial advantage. Nor did the attackers do anything that could not have been copied by any of their competitors, had they reacted in time. But, over time, the attackers became so effective at implementing their strategies, and extending them into new areas, that the approaches they employed were no longer easily replicable. There are two ways in which these successful attackers created and exploited their operating advantage. First, they adopted an operations strategy that gave them a competitive advantage along dimensions or in locations that, although valued by certain subsets of their customers, were not being emphasized by ‘competitors. This is what is sometimes referred to as a differentiating competitive position. Often, the operating capabilities they developed were cultivated in other countries or different industries. Second, they reinforced this alternative way of appealing to customers with the development of a tightly integrated system of supporting values, skills, technologies, supplier/customer relationships, human resources, and approaches to motivation that were neither easily copied nor transferable to other organizations. The, key to the successful counterattacks was that the incumbents either persuaded customers that their own competitive advantage was more desirable than the attacker's; they exploited the inherent weaknesses in the attackers specialized operating systems; and/or they emulated its strategy so quickly that the attacker never had enough time to develop a superior operating effectiveness. Scanned with CamScanner