Chapter 2 - Operations

Strategy and
Competitiveness
Operations Management
by
R. Dan Reid & Nada R. Sanders

4th Edition Wiley 2010

Wiley 2010 1
The Role of Operations
Strategy
Provide a plan that makes best use
of resources which;
Specifies the policies and plans for
using organizational resources
Supports Business Strategy as shown
on next slide

Wiley 2010 2
Business/Functional
Strategy

Wiley 2010 3
Background: Business
Strategy

http://www.youtube.com/watch?v=mYF2_FBCvXw

http://www.youtube.com/watch?v=ehMAwIHGN0Y

Wiley 2010 4
Importance of Operations
Strategy
Companies often do not understand
the differences between operational
efficiency and strategy
Operational efficiency is performing tasks
well, even better than competitors
Strategy is a plan for competing in the
marketplace
Operations strategy is to ensure all
tasks performed are the right tasks

Wiley 2010 5
Developing a Business
Strategy
A business strategy is developed after
taking into many factors and following
some strategic decisions such as;
What business is the company in
(mission)
Analyzing and understanding the market
(environmental scanning)
Identifying the companies strengths (core
competencies)

Wiley 2010 6
Three Inputs to a Business
Strategy

Wiley 2010 7
Examples from Strategies
Mission: Dell Computer- to be the most
successful computer company in the world
Environmental Scanning: political trends,
social trends, economic trends, market
place trends, global trends
Core Competencies: strength of workers,
modern facilities, market understanding,
best technologies, financial know-how,
logistics

Wiley 2010 8
 Example: Nokia
Nokia extended its already formidable dominance of the
global handset business on Jan. 24, announcing it had
achieved 40% market share in the fourth quarter of 2007.
But perhaps the biggest surprise was that the Finnish
company achieved this long-promised and psychologically
important milestone while also becoming more profitable.

http://www.businessweek.com/globalbiz/content/jan2008/gb20080124_974301.htm?chan=search

Wiley 2010 9
Developing an Operations
Strategy
Operations Strategy is a plan for the
design and management of
operations functions
Operation Strategy developed after
the business strategy
Operations Strategy focuses on
specific capabilities which give it a
competitive edge competitive
priorities
Wiley 2010 10
Operations Strategy
Designing the Operations
Function

Wiley 2010 11
Competitive Priorities- The
Edge
Four Important Operations
Questions: Will you compete on
Cost?
Quality?
Time?
Flexibility?
All of the above? Some? Tradeoffs?
Wiley 2010 12
Competing on Cost?
Offering product at a low price relative to competition
Typically high volume products
Often limit product range & offer little
customization
May invest in automation to reduce unit costs
Can use lower skill labor
Probably use product focused layouts
Low cost does not mean low quality

Wiley 2010 13
Competing on Quality?
Quality is often subjective
Quality is defined differently depending on who is
defining it
Two major quality dimensions include
High performance design:

Superior features, high durability, & excellent customer service

Product & service consistency:

Meets design specifications

Close tolerances

Error free delivery
Quality needs to address
Product design quality product/service meets
requirements
Process quality error free products

Wiley 2010 14
Competing on Time?
Time/speed one of most important
competition priorities
First that can deliver often wins the race
Time related issues involve
Rapid delivery:

Focused on shorter time between order placement and
delivery
On-time delivery:

Deliver product exactly when needed every time

Wiley 2010 15
Competing on Flexibility?
Company environment changes rapidly
Company must accommodate change by
being flexible
Product flexibility:
Easily switch production from one item to another
Easily customize product/service to meet specific
requirements of a customer

Volume flexibility:
Ability to ramp production up and down to match
market demands

Wiley 2010 16
The Need for Trade-offs
Decisions must emphasis priorities that support
business strategy
Decisions often required trade offs
Decisions must focus on order qualifiers and order
winners
Which priorities are Order Qualifiers?
e.g. Must have excellent quality since everyone
expects it

Which priorities are Order Winners?

e.g. Southwest Airlines competes on cost
McDonalds competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility

Wiley 2010 17
Competitive Priorities front &
center
http://www.businessweek.com/mag
azine/content/06_13/b3977009.htm
http://www.businessweek.com/mag
azine/content/06_13/b3977010.htm
?chan=search
http://www.businessweek.com/tech
nology/content/dec2007/tc2007122
8_106857.htm?chan=search

Wiley 2010 18
Translating to Production
Requirements
Specific Operation requirements
include two general categories
Structure decisions related to the

production process, such as characteristics

of facilities used, selection of appropriate
technology, and the flow of goods and
services
Infrastructure decisions related to

planning and control systems of

operations
Wiley 2010 19
Translating to Production
Requirements
Dell Computer example structure &
infrastructure

They focus on customer service, cost, and speed
ERP system developed to allow customers to
order directly from Dell
Product design and assembly line allow a make
to order strategy lowers costs, increases turns
Suppliers ship components to a warehouse within
15 minutes of the assembly plant - VMI
Dell set up a shipping arrangement with UPS

Wiley 2010 20
Strategic Role of
Technology
Technology should support competitive
priorities
Three Applications: product technology,
process technology, and information technology
Products - Teflon, CDs, fiber optic cable
Processes flexible automation, CAD
Information Technology POS, EDI, ERP,
B2B

Wiley 2010 21
Technology for
Competitive Advantage
Technology has positive and
negative potentials
Positive

Improve processes

Maintain up-to-date standards

Obtain competitive advantage
Negative

Costly

Promotes dependency

Risks such as overstating benefits
Wiley 2010 22
Technology for
Competitive Advantage
Technology should
Support competitive priorities
Can require change to strategic plans
Can require change to operations
strategy

Technology is an important strategic

decision

Wiley 2010 23
 Measuring Productivity
Productivity is a measure of how efficiently inputs are
converted to outputs
Productivity = output/input

Total Productivity Measure:

Total Productivity = (total output)/(total of all
inputs)

Partial Productivity Measure:

Partial Productivity = (total output)/(single input)

Multifactor Productivity Measure:

Multi-factor Productivity = (total output)/(several inputs)

Wiley 2010 24
Total Productivity: example
Bluegill Furniture makes kitchen chairs. The
weekly dollar value of its output, including
finished goods and work-in-progress, is
$14,280. The value of inputs (labor, materials,
capital) is approximately $16,528. What is the
total productivity measure for Bluegill?
Total productivity = output/input
= $14,280/$16,528 = .864 or
86.4%

Wiley 2010 25
Partial Productivity: example
Bluegill Furniture has hired 2 new workers to
paint chairs. Together they have painted 10
chairs in 4 hours. What is labor productivity for
the pair?
Labor productivity = output/labor

= (10 chairs)/(2 x 4 hr)

= (10 chairs)/(8 hr) or 1.25
chairs/hr

Wiley 2010 26
Multifactor Productivity:
example
Bluegill Furniture averages 35 chairs/day. Labor
costs average $480, material costs are
typically $200, and overhead cost is $250.
Bluegill sells the chairs to a retailer for
$70/unit. Find multifactor productivity.
Multifactor productivity =
(value of output)/(labor + material + overhead
costs)
= ($70/chair x 35 chairs)/(480+200+250)
= ($2450)/($930) or 2.63

Wiley 2010 27
Interpreting Productivity
Measures
Productivity measures must be compared
to something, i.e. another year, a
different company
Raw productivity calculations do not tell
the complete story unless there are no
major structure differences.

Wiley 2010 28
Interpreting Productivity
Measures
Other productivity measure
questions;
Is this partial productivity measurement
enough to make an investment
decision?
Should you also look at productivity
measures for the two major competitors
for comparison?
Productivity measure provides
information on how the firm is doing
relative to what is critical to the firm

Wiley 2010 29
Productivity, Competitiveness,
and the Service Sector
Productivity is a scorecard
on effective resource use
A nations Productivity
effects its standard of
living
US productivity growth
averaged 2.8% from
1948-1973
Productivity growth
slowed for the next 25
years to 1.1%
Productivity growth in
service industries has
been less than in
manufacturing

Wiley 2010 30
Productivity and the
Service Sector
Measuring service sector
productivity is a unique challenge
Traditional measures focus on
tangible outcomes
Service industries primarily produce
intangible outcomes
Measuring intangibles is challenging

Wiley 2010 31
Operations Strategy
Across the Organization
Business strategy defines long-
term plan
Operations strategy support the
business strategy
Marketing strategy needs to fully
understand operations capability
Financial plans in effect support
operations activities.
Wiley 2010 32
Review of Learning
Objectives
Define the role of Business Strategy
Explain how a Business strategy is
developed
Explain the role of Operations Strategy
in the organization
Explain the relationship between business
strategy and operations strategy
Describe how an operations strategy is
developed

Wiley 2010 33
Review of Learning
Objectives
Identify competitive priorities for of
the operations function
Explain the strategic role of
technology
Define productivity and identify
productivity measures
Compute productivity measures

Wiley 2010 34
Chapter 2 Highlights
Business Strategy is a long range plan and
vision. Each individual business function develop
needs to support the business strategy
An organization develops its business strategy by
doing environmental scanning and considering
its mission and its core competencies.
The role of operations strategy is to provide a
long-range plan for the use of the companys
resources in producing the companys primary
goods and services.
The role of business strategy is to serve as an
overall guide for the development of the
organizations operations strategy.

Wiley 2010 35
 Chapter 2 Highlights
The operations strategy focuses on developing
specific capabilities called competitive priorities.
There are four categories of competitive priorities:
cost, quality, time, and flexibility
Technology can be sued by companies to gain a
competitive advantage and should be acquired to
support the companys chosen competitive priorities
Productivity is a measure that indicates how
efficiently an organization is using its resources
Productivity is computed as the ratio or
organizational outputs divided by inputs

Wiley 2010 36
 Example: Detroit Edison
DTE's journey into the distributed-energy business began in
1994 when CEO Anthony Earley took over Detroit Edison.
Convinced that the utility industry was on an eventual
collision course with customer needsDistributed
generation soon became a strategic goal of the company.
The idea behind distributed generation is that a school,
hospital, or office complex can produce its own power just as
cheaply as it can buy it from the grid. When rates go up, it
can produce extra energy and sell it back to the grid. When
rates go lower, it can shut down its generator and buy the
cheaper electricity from the utility. This approach allows
customers to get slightly cheaper electricity from a more
stable source that won't suffer interruptions (which is
especially important to computer-intensive companies) and
can flexibly meet changing demands.
Wiley 2010 37
http://www.businessweek.com/bwdaily/dnflash/jul2001/nf2001072_224.htm?chan=search
 Example: Nestle
Brabeck's other strategic goal is transforming Nestle from a
set of far-flung operations into a single global machine. He
has inked a $200 million deal with SAP to link its five e-mail
systems and permit Nestle's headquarters in Vevey,
Switzerland, to know for the first time how many raw
materials its subsidiaries buy, in total, from around the
world. The company then will be able to negotiate better
contracts with suppliers and centralize production. Last year
alone, Brabeck closed 38 different factories. All told, he has
slashed $1.6 billion in costs, without labor strife.

http://www.businessweek.com/magazine/content/01_24/b3736644.htm?chan=search

Wiley 2010 38