Iona College

Operations
Management
MBA-540
Jerry Fjermestad

2-1
 Operations
Management
Operations Strategy for
Competitive Advantage
Chapter 2
2-2
 Outline
♦ Global Company Profile: Komatsu
♦ Identifying Missions and Strategies
♦ Mission
♦ Strategy

♦ Achieving Competitive Advantage

Through Operations
♦ Competing on Differentiation
♦ Competing on Cost
♦ Competing on Response

2-3
 Outline - continued
♦ Ten Strategic OM decisions
♦ Issues in Operations Strategy
♦ Research
♦ Preconditions
♦ Dynamics

♦ Strategy Development and Implementation

♦ Identify Critical Success Factors
♦ Build and Staff the Organization
♦ Integrate OM with Other Activities

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 Learning Objectives
When you complete this chapter,
you should be able to :
♦ Identify or Define:
♦ Mission
♦ Strategy
♦ Ten Decisions of OM

♦ Describe or Explain:
♦ Specific approaches used by OM to
achieve strategic concepts
♦ Differentiation
♦ Low Cost
♦ Response
2-5
 Komatsu Strategies
♦ 1960s - licensed design and technology from
others; improved quality
♦ 1970s - became global enterprise and built
export markets aided by increasing value of yen
♦ 1980s - joint ventures with Dresser, and
manufacturing outside Japan
♦ 1990s - used the latest technology to improve
quality and drive down costs; focused on
electronic engine controls
♦ 2000s - increased European presence through
ownership and joint ventures

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 Komatsu Strategies
Each strategy established in light of:

♦ threats and opportunities in the environment

♦ strengths and weaknesses of the

organization
(related to environment)

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 Mission

♦ Mission - where are

you going?
♦ Organization’s purpose for
being
♦ Provides boundaries &
focus
♦ Answers ‘How can we
satisfy people’s needs?’
♦ Expressed in published
statement
© 1995 Corel Corp.

2-8
Sample Mission - Circle
K

As a service company, our mission

is to:
Satisfy our customers’ immediate
needs and wants by providing
them with a wide variety of goods
and services at multiple locations.

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Sample Mission - Merck
The mission of Merck is to provide society
with superior products and services -
innovations and solutions that improve the
quality of life and satisfy customer needs -
to provide employees with meaningful work
and advancement opportunities and
investors with a superior rate of return

2-10
 Factors Affecting
Mission
Philosophy &
Values

Profitability
Environment
& Growth
Mission

Customers Public Image

Benefit to
Society

2-11
 Mission/Strategy

♦ Mission - where you are going

♦ Strategy - how you are going

to get there

2-12
 Strategy

♦ Action plan to
achieve mission
♦ Shows how mission
will be achieved
♦ Company has a
business strategy
♦ Functional areas
have strategies © 1995 Corel Corp.

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 Strategy Process
Company
Mission

Business
Strategy

FunctionalArea
Functional Area
Strategies

Marketing Operations Fin./Acct.

Decisions Decisions Decisions

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Competitive Advantage
Through:
♦ Differentiation

♦ Cost leadership

♦ Quick response
better, cheaper, more
responsive
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 Competing on
Differentiation

♦ Uniqueness - can go beyond

both the physical
characteristics and service
attributes to encompass
everything that impacts
customer’s perception of value

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 Competing on Cost

♦ Maximum value as perceived

by customer
♦ Does not imply low value or
low quality

2-17
 Competing on
Response

♦ Flexible
♦ Reliable
♦ Rapid

Requires institutionalization
within the firm of the ability to
respond

2-18
 Competing On Any
Basis

♦ Probably requires the

institutionalization within the
firm of the ability to change,
to adapt

2-19
 OM’s Contribution to
Operatio
Strategy
Exampl Specific Competi
ns Strategy tive
Decision es Used Advanta
Quality
s FLEXIBILITY ge
Sony’s constant innovation of new products Design
Product
Compaq Computer’s ability to follow the PC market
Volume

Process Southwest Airlines No-frills service LOW COST

Location DELIVERY
Pizza Hut’s five-minute guarantee at lunchtimeSpeed
Layout Federal Express’s “absolutely, positively on Dependability
time” Differentiation
(Better)
Human QUALITY
Conformance
Motorola’s automotive products ignition systems Respons
Resource Cost e
Motorola’s pagers Performance leadership (Faster)
Supply Chain (Cheaper)

IBM’s after-sale service on mainframe computers

Inventory AFTER-SALE SERVICE

Fidelity Security’s broad line of mutual BROAD

funds PRODUCT LINE
Scheduling

Maintenance
2-20
 10 Decision Areas of
OM
♦ Goods & service design
♦ Quality
♦ Process & capacity design
♦ Location selection
♦ Layout design
♦ Human resource and job design
♦ Supply-chain management
♦ Inventory
♦ Scheduling
♦ Maintenance

2-21
Goods & Services and the
10 Operations
Management Decisions
Operations Goods Services
Decisions
Goods & Product is usually Product is usually
services tangible intangible
decisions
Quality Objective quality Subjective quality
standards standards

Process Customer not involved Customer may be directly

and in most of process involved in process.
capacity Capacity must match
design demand to avoid lost sales
2-22
Goods & Services and the
10 Operations
Management Decisions
Operations Goods Services
Decisions
Location May need to be near raw Product is usually
Selection materials or labor force intangible
Layout Layout can enhance Subjective quality
Design production efficiency standards
Human Workforce focused on Customer may be directly
Resources technical skills. involved in process.
and J ob Labor standards consistent. Capacity matches
Design Output-based wage system. demand to avoid lost
sales

2-23
Goods & Services and the
10 Operations
Management Decisions
Operations Goods Services
Decisions
Supply chain Supply-chain Supply-chain relationships
management relationships critical to important, not necessarily
final product critical
Inventory Rawmaterials, work- Most services cannot be
in-process, and stored
finished goods
Scheduling Ability to convert Primarily concerned with
inventory may allow meeting the customer's
leveling of production immediate schedule
rates
2-24
Goods & Services and the
10 Operations
Management Decisions
Operations Goods Services
Decisions
Maintenance Maintenance is often Maintenance is often
preventive and takes "repair" and takes place at
place at the production the customer's site
site

2-25
 Process Design
Customization at
High Process-focused high Volume
Job Shops Mass
(Print shop, emergency Customization
(Dell Computer’s PC)
room , machine shop,
Repetitive (modular)
Variety of Products

fine dining
focus
Assembly line
Moderate (Cars, appliances, TVs,
fast-food restaurants)
Product-focused
Continuous
(steel, beer, paper, bread)

Low
Low Moderate High
Volume
2-26
 Operations Strategies
for Two Drug
Companies
BrandNameDrugs, Generic DrugCorp.
Inc.
Competitive Product Differentiation LowCost
Advantage
Product Heavy R&D; Little R&D
Selection Extensive Labs
and Design
Quality Quality is a major Meets regulatory requirements on
priority; a country-by-country basis as
Standards exceed necessary
regulatory
requirements
2-27
 Operations Strategies
for Two Drug
Companies
BrandNameDrugs,
- continued
Generic DrugCorp.
Inc.
Processes Product&modular Process focuses
productionprocesses General productionprocesses;
Longproductruns in JobShopapproach, shortrun;
specializedfacilities Focus onhighutilization
Buildcapacity ahead
of demand
Location Still locatedincity in Recently movedto lowtax, lowlabor cost
whichitwas founded environment
Scheduling Central production Many short runproducts complicate
planning scheduling

2-28
 Operations Strategies
for Two Drug
Companies -
BrandNameDrugs,
continued
Generic DrugCorp.
Inc.
Human Hires the best; nation- Very experienced top executives
Resources wide searches provide direction; other
personnel paid belowaverage
Supply Long termsupplier Tends to purchase competitively
Chain relationship to find bargains
Inventory Maintains high finished Process focus drives up WIP
goods inventory, inventory.
primarily to ensure all Finished goods inventory tends
demands are met to be low

2-29
 Operations Strategies
for Two Drug
Companies - continued
BrandNameDrugs, Generic DrugCorp.
Inc.
Maintenance Highly trained staff; Highly trained staff to meet
Extensive parts challenging demands
inventory

2-30
Characteristics of High
ROI Firms
♦ High quality product
♦ High capacity utilization
♦ High operating effectiveness
♦ Low investment intensity
♦ Low direct cost per unit

From the PIMS study of the

Strategic Planning
Institute
2-31
 Strategic Options
Managers Use to Gain
Competitive Advantage
♦ 28% - Operations Management
♦ 18% - Marketing/distribution
♦ 17% - Momentum/name
recognition
♦ 16% - Quality/service
♦ 14% - Good management
♦ 4% - Financial resources
♦ 3% - Other

2-32
 Strategic Options
Managers Use to Gain
Competitive Advantage
♦ 28% Operations Management
♦ Low- cost product
♦ Product-line breadth
♦ Technical superiority
♦ Product
characteristics/differentiation
♦ Continuing product innovation
♦ Low-price/high-value offerings
♦ Efficient, flexible operations
adaptable to consumers
♦ Engineering research development
♦ Location
♦ Scheduling

2-33
 Strategic Options
Managers Use to Gain
Competitive Advantage
- continued
♦ 18% Marketing/Distribution
♦ 17% Momentum/name
recognition
♦ 16% Quality/service
♦ 14% Good management
♦ 4% Financial resources
♦ 3% Other

2-34
 Preconditions -
To Implement a
Strategy
One must understand:
♦ Strengths & weaknesses of competitors and
new entrants into the market
♦ Current and prospective environmental, legal,
and economic issues
♦ The notion of product life cycle
♦ Resources available with the firm and within
the OM function
♦ Integration of OM strategy with company
strategy and with other functions.

2-35
 Impetus for Strategy
Change

♦ Changes in the organization

♦ Stages in the product life cycle
♦ Changes in the environment

2-36
 Stages in the Product
Life Cycle
Introduction
Growth

Growth
rate

Maturity

Decline

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 Strategy and Issues
During a Product’s Life
Introduction Growth Maturity Decline
Best period to Practical to Poor time to Cost
increase change price or change image, control
market share quality image price, or quality critical
R&D product Strengthen Competitive costs
engineering become critical
niche
Strategy/Issues

critical
Defend market
Drive-thru position Fax
machines 3 1/2”
restaurants
Floppy
Company

CD-
disks
Sales ROM
Station
Internet wagons
Color copiers

HDTV

Product design and Forecasting critical Standardization Little product

development critical Product and differentiation
Less rapid product
Strategy/Issues

Frequent product process reliability changes - more Cost

and process design minor changes
Competitive minimization
changes product Optimum capacity
improvements and Overcapacity in
Short production options Increasing
runs the industry
stability of
Increase capacity process Prune line to
OM

High production
costs Shift toward eliminate items
product focused Long production
runs not returning
Limited models Enhance good margin
Attention to quality distribution Product
improvement and Reduce capacity
cost cutting
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Strategy & Issues During
Product Life
Introduction
♦ Company Best period to increase market share
Strategy R&D engineering are critical
& Issues
Product design and development are critical
Frequent product and process design
changes
Over-capacity
♦ OM Short production runs
Strategy High skilled-labor content
High production costs
& Issues
Limited number of models
Utmost attentions to quality
Quick elimination of market-revealed design
defects

2-39
Strategy & Issues During
Product Life
Growth

Company Practical to change prices or quality

image
Strategy Marketing is critical
Strengthen niche
& Issues
Forecasting is critical
Product and process reliability
OM Competitive product improvements and
options
Strategy Shift toward product oriented
& Issues Enhance distribution

2-40
Strategy & Issues During
Product Life
Maturity
Poor time to increase market share
Company Competitive costs become critical
Poor time to change price, image, or quality
Strategy Defend position via fresh promotional and
& Issues distribution approaches

Standardization
Less rapid product changes and more minor
annual model changes
Optimum capacity
OM Increasing stability of manufacturing process
Strategy Lower labor skills
Long production runs
& Issues Attention to product improvement and cost
cutting
Re-examination of necessity of design
compromises
2-41
 Strategy & Issues During
Product Life
Decline

Company Cost control critical to market share

Strategy
& Issues
Little product differentiation
Cost minimization
OM Strategy Overcapacity in the industry
Prune line to eliminate items not returning
& Issues Good margin
Reduce capacity

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Strategy Development
and Implementation

♦ Identify critical success factors

♦ Build and staff the
organization

2-43
SWOT Analysis Process

♦ Environmental Analysis

♦ Determine Corporate Mission

♦ Form a Strategy

2-44
 SWOT Analysis to
Strategy Formulation

Mission

Internal External
Strengths Opportunities
Strategy

Internal External
Weaknesses Threats
Competitive
Advantage
2-45
 Identifying
Critical Success Factors
Marketing Finance/Accou Production/Oper
Service nting ations
Distribution Leverage
Promotion Cost of capital
Channels of Working capital
distribution Receivables
Product Payables
positioning Financial control
(image, Lines of credit
functions)
Decisions Sample Options
Product Customized, or standardized
Quality Define customer expectations and how
to achieve them
Process Facility size, technology
Location Near supplier or customer
Layout Work cells or assembly line
Human resource Specialized or enriched jobs
Supply chain Single or multiple source
suppliers
Inventory When to reorder, how much to
keep on hand
Schedule Stable2-46
or fluctuating
productions rate
Critical Success Factors
Microsoft & Compaq
♦ They focus on one business
♦ They are global
♦ Their senior management is actively
involved in defining and improving the
product development process
♦ They recruit and retain the top people in
their fields.
♦ They understand that speed to market
reinforces product quality

2-47
 Southwest Airline’s Low
Cost Competitive
Advantage
Courteous,
but limited
passenger
service
Lean, Competitive Short haul,
productive point-to-point
Advantage:
employees routes, often to
Low Cost secondary
High airports
aircraft Frequent,
utilizati reliable
Standardized schedules
on
fleet of
Boeing 357
aircraft
2-48
Southwest Airline’s Low
Cost Competitive
Advantage
Courteous,
but limited
passenger
service

No seat assignments
No baggage transfers
Automated ticketing machines
No meals

2-49
Southwest Airline’s Low
Cost Competitive
Advantage
Lower gate
costs at Short haul,
secondary point-to-point
airports routes, often to
secondary
High number of airports
flights, reduces
employee idle
time between
flights
2-50
Southwest Airline’s Low
Cost Competitive
Advantage

High number of
flights reduces
employee idle time
between flights
Saturate a city with
Frequent,
flights flowering reliable
administrative costs schedules
per passenger for
that city 2-51
Southwest Airline’s Low
Cost Competitive
Advantage
Pilot training on only
one type of aircraft
Reduced maintenance
inventory required
because of only one
type of aircraft
Excellent supplier
relations with Boeing
has aided financing
Standardized
fleet of
Boeing 357
2-52
aircraft
Southwest Airline’s Low
Cost Competitive
Advantage
Flexible employees and
standard planes aids
scheduling
Flexible union
contracts
High Maintenance personnel
aircraft trained on only one
utilizati type of aircraft
on
15 minute gate
turnarounds
2-53
 Southwest Airline’s Low
Cost Competitive
Advantage
High level of stock ownership
Hire for attitude, then train
Lean,
High employee compensation
productiveEmpowered employees
employeesAutomated ticket machines

2-54
 Southwest Airline’s Low
Cost Competitive
Advantage
Courteous,
but limited
passenger
service
Lean, Competitive Short haul,
productive point-to-point
Advantage:
employees routes, often to
Low Cost secondary
High airports
aircraft Frequent,
utilizati reliable
Standardized schedules
on
fleet of
Boeing 357
aircraft
2-55
 Vanguard’s Activity
System
A broad array of
mutual funds
excluding some
Very low fund categories
Efficient
expenses investment
passed on management
to client approach offering
Strict good consistent
cost performance
control
Straightforward
Direct
client
distributi
communication
ons
and education
2-56
 How It Works

If Distinctive
competitive Company
competencies
advantage, Mission
affect
leads to Business
achieving Strategy

Functional Area
Strategies

Marketing Operations Fin./Acct.

Decisions Decisions Decisions

2-57