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chapter 2 Operations
Operations Strategy:
Strategy:
Defining
Defining How
How Firms
Firms Compete
Compete
PowerPoint
Presentation
by
Charlie
Cook
© The McGraw-Hill Companies, Inc., 2003
 Chapter
Chapter Objectives
Objectives
• Introduce the concept of operations strategy and its
various components, and show how it relates to the
overall business strategy of the firm.
• Illustrate how operations strategy pertains to adding
value for the customer.
• Identify the different ways in which operations strategy
can provide an organization with a competitive
advantage.
• Introduce the concept of tradeoffs between different
strategies and the need for a firm to align its operations
strategy to meet the needs of the particular markets it is
serving.
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–2
 Chapter
Chapter Objectives
Objectives (cont’d)
(cont’d)
• Explain the difference between order-qualifiers and
order-winners as they pertain to operations strategy.
• Describe how firms are integrating manufacturing and
services to provide an overall “bundle of benefits” to
their customers.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–3

 Managerial
Managerial Issues
Issues
• Developing and Implementing Effective
Strategies
–Meeting the challenges of increased competition
in a globalized business environment.
–Keeping up with technology advances.
–Learning to do more with less.
–Staying ahead of copycat competitors.
–Keeping an eye on the future.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–4

 Operations
Operations Strategy
Strategy –– An
An Overview
Overview
• Corporate strategy
–Overall strategy adopted by the firm that defines
the specific businesses in which the firm will
compete and the way in
which resources are
acquired and allocated.

Corporate
Business
Functional
Operational

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–5

 Operations
Operations Strategy
Strategy –– An
An Overview
Overview
• Strategic Business Unit (SBU)
–A stand-alone business within a conglomerate
(parent firm) that operates like an independent
company.
• Business Strategy
–How a strategic business unit (SBU) addresses
the specific markets it serves and products it
provides.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–6

 Types
Types of
of Business
Business Strategies
Strategies
Type Definition

Low Cost Producing the lowest cost products in the

market.

Market Satisfying the needs of a particular market

Segmentation niche.

Product Offering products that differ significantly from

Differentiation the competition.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–7

 Operations
Operations Strategy
Strategy –– An
An Overview
Overview
• Functional Strategies
–Strategy developed by a function (e.g.,
marketing) within an organization to support the
business strategy.
• Competitiveness
–A company’s position in the marketplace relative
to its competition.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–8

 Operations
Operations Strategy
Strategy –– An
An Overview
Overview
• Operations Strategy
–How the operations function contributes to
competitive advantage.
• Competitive Priorities
–How the operations function provides a firm
with a competitive advantage.
–Priorities—Low cost, high quality, fast delivery,
flexibility, and service.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–9

 What
What isis Operations
Operations Strategy?
Strategy?
• Operations Strategy
–Determining how to best utilize the firm’s
resources to achieve corporate objectives.
• Major long-term structural issues
–How big do we make the facilities?
–Where do we locate them?
–When do we build them?
–What type of process(es) do we install to make
the products?

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–10

 Hierarchy
Hierarchy of
of Operational
Operational Planning
Planning

Exhibit 2.1
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–11
 Operations
Operations Strategy
Strategy Means
Means
Adding
Adding Value
Value for
for the
the Customer
Customer
Total Benefits
Perceived Customer Value  (2.1)
Total Costs
Perceived Customer Value  Total Benefits - Total Costs (2.2)

If benefits exceed costs, the customer perceives

value for the product or service.

“Value is in the eye of the beholder”

What affects customer perceptions of value?

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–12

 Maximizing
Maximizing Value
Value Added
Added in
in Operations
Operations

Exhibit 2.2
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–13
 Operations
Operations Strategy
Strategy Means
Means
Adding
Adding Value
Value for
for the
the Customer
Customer

• How to add value:

–Reduce product costs to customer.
–Make the product more readily available.
–Provide faster service.
–Provide customers with additional relevant
information.
–Customize the product to the customer’s
specific needs.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–14

 Trends
Trends Affecting
Affecting Operations
Operations
Strategy
Strategy Decisions
Decisions

• Globalization
–Global village with hyper-competition:
• Continuous information technology advances
• Lower trade barriers
• Lower transportation costs
• Emergence of newly industrialized countries (NIC)
with high-growth markets and high standards of
living

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–15

 Trends
Trends Affecting
Affecting Operations
Operations
Strategy
Strategy Decisions
Decisions (cont’d)
(cont’d)

• Technology
–Connectivity—anyone, anywhere, all the time
–Speed—instantaneous transactions
–Intangibility—focus on innovative services to
gain competitive advantage
• Simultaneous Competition on Multiple
Competitive Priorities
–No traditional trade-offs of priorities

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–16

 Competitive
Competitive Priorities
Priorities
Type Priority

Low Cost Providing low cost products.

Controlling costs across the board.

Quality Providing high quality products.

Focus is on product and process quality.

Delivery Providing products reliably and quickly.

Flexibility Providing a wide variety of products (mass

customization).
How fast a firm can produce a new product line.

Service Providing “value-added” service.

How products are delivered and supported.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–17

 The
The Next
Next Sources
Sources of
of
Competitive
Competitive Advantage?
Advantage?

• Two New Trends

–The use of environmentally friendly processes
and environmentally friendly products
–The use of information
• Large quantities data can now be accurately
stored and transmitted inexpensively.
• Competitive advantage can be gained through
products and services that provide enhanced
levels of feedback.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–18

 Developing
Developing an
an Operations
Operations Strategy
Strategy
from
from Competitive
Competitive Priorities
Priorities

• Factory Focus and Trade-offs

–A factory could not focus on all four competitive
priorities (cost, quality, delivery, and flexibility).
• Focusing performance on one priority
limits/eliminates the ability to focus on another
priority.
• Plant-within-a-Plant (PWP) concept (Skinner)
–Different locations with a facility would focus on
their own competitive priority.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–19

 Developing
Developing an
an Operations
Operations Strategy
Strategy
from
from Competitive
Competitive Priorities
Priorities (cont’d)
(cont’d)
• Questioning the Trade-Offs
–World-class operations led to the establishment
of a hierarchy among the competitive priorities.
• Increased competitive capabilities led to increased
performance on all priorities by all competitors.
• Focus shifted from cost minimization to
maximizing the value added.
–Customer value is enhanced by the focus on
multiple priorities.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–20

 Time
Time Line
Line for
for Operations
Operations Strategies
Strategies

Exhibit 2.3
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–21
 Example
Example of
of Trade-Offs
Trade-Offs on
on
Superior
Superior Performance
Performance Curves
Curves

Exhibit 2.4
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–22
 Order
Order Qualifiers
Qualifiers and
and Order
Order Winners
Winners
• Order Qualifiers
–The minimum characteristics of a firm or its
products that a firm must have to be considered
as a source of purchase.
• Order Winners
–The characteristics of a firm that distinguish it
from its competition so that it is selected as the
source of purchase.
• ISO-9000 certification

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–23

 Distinguishing
Distinguishing between
between
Order
Order Qualifiers
Qualifiers and
and Order
Order Winners
Winners

Exhibit 2.5
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–24
 Focusing
Focusing on
on Core
Core Capabilities
Capabilities
• Core Capabilities
–Specific strengths that allow a company to
achieve its competitive priorities.
–The skill or set of skills that the operations
management function develops that allows the
firm to differentiate itself from its competitors.
• Focusing is achieved by:
–Divesting non-critical activities.
–Subcontracting ancillary activities and services.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–25

 Integration
Integration of
of Manufacturing
Manufacturing and
and Services
Services

• The Customer’s Activity Cycle (CAC)

Component Actions

Pre-purchase activities Being responsive to customer

inquires and the ability to
demonstrate technical expertise.

Purchase activities Actual sale and delivery of the

product and collecting payment.

Post-purchase activities After-sales service and product

warranties

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–26

 The
The Customer’s
Customer’s Activity
Activity Cycle
Cycle

Exhibit 2.6
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–27
 Service
Service Strategies
Strategies for
for Manufacturing
Manufacturing Firms
Firms
(Wise
(Wise and
and Baumgartner)
Baumgartner)
Service Strategy Function

Embedded Services Specific functions that are a part of

the product itself.

Comprehensive Services The manufactured product is

“married” to additional services.

Integrated Solutions Combining product and services

into a seamless offering that
addresses a specific customer
requirement.

Distribution Control Manufacturing goes downstream to

assume responsibility for product
distribution.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–28

 Additional
Additional Approaches
Approaches for
for Integrating
Integrating
Manufacturing
Manufacturing and
and Services
Services
• Demonstration of Knowledge and Expertise
–Reassuring customers by allowing them to view
the production process and have access to
production employees.
• Customer Training
–Providing product training to customers to build
product loyalty and increased use of products.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–29