Operations Management: 6th Edition

Chapter 2 - Operations Strategy
and Competitiveness
1
Operations Management
6th Edition
R. Dan Reid & Nada R. Sanders
Copyright © 2016 John Wiley & Sons, Inc.

Learning Objectives
2
Explain the role of operations strategy in the

organization.
Explain how a business strategy is developed.
Describe how an operations strategy is developed.
Explain the strategic role of technology.
Define productivity and identify productivity measures.

The Role of Operations Strategy
3
Provides a plan that makes best use of resources

and:
 Specifies the policies and plans for using organizational
resources
 Supports Business Strategy - an organizations long range plan
(see graph on next slide)

Business/Functional Strategy
4

Importance of Operations Strategy
5
Essential differences between operational

efficiency and strategy:
 Operational efficiency is performing tasks well, or better than
competitors
 Strategy is a plan for competing in the marketplace
Operations strategy ensures all tasks performed are
the right tasks

Developing a Business Strategy
6
Consider these three critical factors in developing a

business strategy:
 What is the business goal? (mission)
 Does company understand the market? (environmental
scanning)
 What are the company strengths? (core competencies)

Core Competencies
7

Creating the Business Strategy
8

Examples of Key Factors
9
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 abilities, logistics

Developing an Operations Strategy
10
Operations Strategy:
Is a plan for the design and management of
operations functions
Is developed after the business strategy
Focuses on specific capabilities which give it a
competitive edge – competitive priorities

Designing the Operations Function
11

Competitive Priorities – The Edge
12
Four Key Operations Questions - Can a company compete

on:
1. Cost?
2. Quality?
3. Time?
4. Flexibility?
All of the above? Some? Tradeoffs?

1. Competing on Cost
13
Offer product at lower price than competition

 Typically high volume products
 Often limit product range with little customization
 May invest in automation to increase productivity
 Might offer extra training to employees
 Focus on cutting costs and eliminating waste
 Low cost does not mean low quality

2. Competing on Quality
14
Quality is often subjective & is defined differently depending on

who is defining it
Two major quality dimensions include
1. High performance design:
 Superior features, high durability, & excellent customer service
2. Product & service consistency:
 Meets design specifications
 Close tolerances
 Error free delivery
Quality must address
 Product design quality – product/service meets requirements
 Process quality – error free products

3. Competing on Time
15
Time/speed a top competitive priority
First to deliver often wins the race
Time-related issues involve:

 Rapid and/or on-time delivery
 Focused on shorter time between order placement and delivering
product exactly when needed every time

4. Competing on Flexibility
16
Business environments can change rapidly;

company’s must accommodate change by being
flexible
 Product flexibility:
 Offer a wide variety of goods/services, easily customized to meet
specific requirements of customer
 Easily drop or add product to meet customer demand
 Volume flexibility:
 Ability to rapidly increase or decrease production to match market
demands

The Need for Trade-offs
17
Decisions
 must emphasize priorities that support business strategy
 often required trade-offs
 must focus on order qualifiers and order winners

Order Qualifiers & Winners
18
Which priorities are “Order Qualifiers”?

Hint: Must meet market’s competitive
priorities since market expects it
Which priorities are “Order Winners”?

Hint: Dell competes on all four priorities
Southwest Airlines competes on cost
McDonald’s competes on consistency
FedEx competes on speed
Pizzerias compete on homemade taste

Translating Competitive Priorities into Production
Requirements
19
Structure decisions related  Infrastructure decisions

to the production process: related to planning &
 characteristics of facilities control systems of
used operations:
 selection of appropriate  organization of operation
technology function
 flow of goods and services  skill/pay of workers
 quality control approaches

Example: Dell Computer
20
Structure & Infrastructure

 Focus on customer service, cost, and speed
 ERP system allows 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

Strategic Role of Technology
21
Technology must support competitive priorities

Three Types of Technology Applications:
1. Product Technology – (New technology)

Examples: Teflon, CD’s, fiber optic cable
2. Process Technology – (Improves process)

Examples: flexible automation, CAD, CAM
3. Information Technology – (Enables communication)

Examples: POS, EDI, ERP, B2B

Technology as a Tool for Competitive Advantage
22
Positive Potential Negative Potential

Benefits Risks
 Improve processes  Costly
 Maintain up-to-date  Can overstate benefits
standards  Obsolescence
 Gain competitive
advantage

Technology as a Tool for Competitive Advantage
23
Technology at Its Best:

 Supports competitive priorities
 Can require change to strategic plans
 Can require change to operations strategy
Technology is a crucial strategic decision

Measuring Productivity
24
 Productivity is a measure of how efficiently inputs are

converted to outputs Productivity = Output/input
 Total Productivity Measure

Total Productivity = Output produced/All inputs used
 Partial Productivity Measure

Partial Productivity = Output/labor or Output/Capital
 Multifactor Productivity Measure

Multi-factor Productivity = Output/labor + Materials

Measuring Productivity
25

Productivity Examples
26

Productivity Examples
27

Interpreting Productivity Measures
28
 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.
 In the prior automobile business example, it is obvious that
some major changes were taking place to yield 15.8% and
13.7% year-to-year cars/employee productivity
improvements. What changes could improve car sales per
employee? Automation? Outsourcing? Major re-design?

Interpreting Productivity Measures
29
Other productivity measure questions:

 Is this partial productivity measurement enough to make
an investment decision?
 Is the Total Cost Productivity measure a better reflection
of year to year productivity at 4.2% and 1.6%. Why?
 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

Productivity and Competitiveness
30
Productivity is a scorecard on effective resource use

 A nation’s Productivity directly related to 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

Changes in U.S. Productivity
31

Productivity and the Service Sector
32
Measuring service sector productivity is a unique

challenge
 Traditional measures focus on tangible outcomes
 Service industries primarily produce intangible outcomes
 Measuring intangibles is challenging

Operations Strategy within OM
33
Strategic decisions of firm drive tactical decisions

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.

Chapter 2 Highlights
34
 Business Strategy is a long range plan and vision. Each

individual business function 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 company’s resources in producing the company’s
primary goods and services.
 The role of business strategy is to serve as an overall guide for
the development of the organization’s operations strategy.

Chapter 2 Highlights
35
 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 used by companies to gain a competitive
advantage and should be acquired to support the company’s
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.

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Chapter 2 - Operations Strategy

Copyright © 2016 John Wiley & Sons, Inc.

Explain the role of operations strategy in the

Copyright © 2016 John Wiley & Sons, Inc.

Provides a plan that makes best use of resources

Copyright © 2016 John Wiley & Sons, Inc.

Copyright © 2016 John Wiley & Sons, Inc.

Essential differences between operational

Copyright © 2016 John Wiley & Sons, Inc.

Consider these three critical factors in developing a

Copyright © 2016 John Wiley & Sons, Inc.

Copyright © 2016 John Wiley & Sons, Inc.

Copyright © 2016 John Wiley & Sons, Inc.

Mission: Dell Computer – “to be the most

Copyright © 2016 John Wiley & Sons, Inc.

Copyright © 2016 John Wiley & Sons, Inc.

Copyright © 2016 John Wiley & Sons, Inc.

Four Key Operations Questions - Can a company compete

Copyright © 2016 John Wiley & Sons, Inc.

Offer product at lower price than competition

Copyright © 2016 John Wiley & Sons, Inc.

Quality is often subjective & is defined differently depending on

Copyright © 2016 John Wiley & Sons, Inc.

Time/speed a top competitive priority

First to deliver often wins the race

Time-related issues involve:

Copyright © 2016 John Wiley & Sons, Inc.

Business environments can change rapidly;

Copyright © 2016 John Wiley & Sons, Inc.

Copyright © 2016 John Wiley & Sons, Inc.

Which priorities are “Order Qualifiers”?

Which priorities are “Order Winners”?

Copyright © 2016 John Wiley & Sons, Inc.

Structure decisions related  Infrastructure decisions

Copyright © 2016 John Wiley & Sons, Inc.

Structure & Infrastructure

 Product design and assembly line allow a “make to order”

Copyright © 2016 John Wiley & Sons, Inc.

Technology must support competitive priorities

1. Product Technology – (New technology)

2. Process Technology – (Improves process)

3. Information Technology – (Enables communication)

Copyright © 2016 John Wiley & Sons, Inc.

Positive Potential Negative Potential

Copyright © 2016 John Wiley & Sons, Inc.

Technology at Its Best:

Technology is a crucial strategic decision

Copyright © 2016 John Wiley & Sons, Inc.

 Productivity is a measure of how efficiently inputs are

 Total Productivity Measure

 Partial Productivity Measure

 Multifactor Productivity Measure

Copyright © 2016 John Wiley & Sons, Inc.

Copyright © 2016 John Wiley & Sons, Inc.

Copyright © 2016 John Wiley & Sons, Inc.

Copyright © 2016 John Wiley & Sons, Inc.

 Productivity measures must be compared to something, i.e.,

Copyright © 2016 John Wiley & Sons, Inc.

Other productivity measure questions:

Productivity measure provides information on how

Copyright © 2016 John Wiley & Sons, Inc.

Productivity is a scorecard on effective resource use

Copyright © 2016 John Wiley & Sons, Inc.