Chapter Two

Operations Strategy
And
Competitiveness

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 Operations Strategy and Competitiveness

• Competitive strategy is about being

different; i.e. deliberately choosing a
different set of activities to deliver a
unique mix of value.

• The essence of strategy in business

activities –choosing to perform activities
differently than rivals; otherwise a strategy
is nothing more than a marketing slogan
that will not withstand competition.

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 Operations strategy and competitiveness
• To maintain a competitive position in the marketplace, a company must
have a long-range plan.
• This plan needs to include the company’s
 long-term goals,
 an understanding of the marketplace, and
 a way to differentiate itself from its competitors.
• The long-range plan of a business, designed to provide and sustain
shareholder value, is called the business strategy.

• Operations strategy is a long-range plan for the operations function that

specifies the design and use of resources to support the business strategy.
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 Cont’d…

• The operations and other strategy must be aligned with the company’s
business strategy and enable the company to achieve its long-term plan.

• Two companies can operate in the same industry, but with very different
business strategies;
 one which has a strategy to compete on cost,
 while the other may have a strategy to compete on service.

• Operations strategy specifies the policies and plans for using the
organization’s resources to support its long-term competitive strategy.
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 Relationship between the business strategy and the functional strategy

Business Strategy
Define Long range plan
for the company

Marketing Strategy Operations Strategy Financial Strategy

Develops a plan for the
Defines Marketing Plan to operations function to support Develops Financial Plan to
support Business Strategy a business strategy support the business strategy

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 Developing a business strategy
• The three factors which are critical to the development of the company’s long-
range plan, or business strategy are:
 the company’s mission - understanding of what business the company is in,
environmental scanning- analyzing and developing an understanding of the market
and
core competencies- identifying the company’s strengths

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 Developing an operations strategy
 Once a business strategy has been developed, an operations strategy
must be formulated.

 The operations strategy relates the business strategy to the operations

function.

 It focuses on specific capability of the operation that give the company a

competitive edge.

 These capabilities are called competitive priorities.

 By excelling in one of these capabilities, a company can become a

winner in its market.

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Cont’d…

Operations strategy and the design of the operations function

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 a) Competitive Priorities
Operations managers must work closely with marketing in order to
understand the competitive situation in the company’s market before they
can determine which competitive priorities are important.
There are four broad categories of competitive priorities :

1. Cost - Competing based on cost means offering a product at a low

price relative to the prices of competing products.

 The role of the operations strategy is to develop a plan for the use of
resources to support this type of competition.

 A low-cost strategy can result in a higher profit margin, even at a

competitive price
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 Cont’d…
 To develop this competitive priority, the operations function must focus
primarily on cutting costs in the system, such as costs of labor, materials,
and facilities.

 Companies that compete based on cost:

 study their operations system carefully to eliminate all waste.

offer extra training to employees to maximize their productivity and

minimize scrap.

 invest in automation in order to increase productivity.

offer a narrow range of products and product features, allow for

little customization, and have an operations process that is designed
to be as efficient as possible.
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 Cont’d…

2. Quality -Many companies claim that quality is their top priority, and
many customers say that they look for quality in the products they buy.

• It depends on who is defining it. For example, quality could be -the

product that lasts a long time, such as with a Volvo, a car known for its
durability; Or It might mean high performance, such as a BMW.

• When companies focus on quality as a competitive priority, they are

focusing on the dimensions of quality that are considered important by
their customers.
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 Quality as a competitive priority has two dimensions:
i) high-performance design -means that the operations function will
be designed to focus on aspects of quality such as superior features,
close tolerances, high durability, and excellent customer service.

ii) goods and services consistency- which measures how often the
goods or services meet the exact design specifications, i.e. the same
product every time at any location.

• A company that competes on this dimension needs to implement quality

in every area of the organization.
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 Cont’d…

Operations function focus on two issues:

Product design quality- which involves making sure the product meets
the requirements of the customer.

 Process quality, which deals with designing a process to produce

error-free products, i.e., the process must produce the product exactly
as it is designed.

This includes focusing on equipment, workers, materials, and every

other aspect of the operation to make sure it works the way it is
supposed to.
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 Cont’d…

3. Time

 Speed is one of the most important competitive priorities today.

 Companies in all industries are competing to deliver high-quality

products in as short a time as possible.

 Making time a competitive priority means competing based on all time-

related issues, such as rapid delivery and on-time delivery.

 Rapid delivery refers to how quickly an order is received;

 On-time delivery refers to the number of times deliveries are made on

time.
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When time is a competitive priority, the job of the operations function
is:
 To critically analyze the system and combine or eliminate
processes in order to save time.

 Use technology to speed up processes,

 Rely on a flexible workforce to meet peak demand periods, and

 Eliminate unnecessary steps in the production process.

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4. Flexibility

Is the ability to readily accommodate rapidly changing company’s

environment, including customer needs and expectations which can be a
winning strategy.

There are two dimensions of flexibility:

 Product flexibility- the ability to offer a wide variety of goods or

services and customize them to the unique needs of clients.

 Volume flexibility- the ability to rapidly increase or decrease the

amount produced in order to accommodate changes in the demand
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 Trade-Offs
The Need for Trade-Offs
• Operations function needs to give special focus to some priorities but
not all. Aren’t all the priorities important?
• As more resources are dedicated toward one priority, fewer resources
are left for others.
• The operations function must place emphasis on those priorities that
directly support the business strategy.
• Therefore, it needs to make trade-offs between the different priorities
 Quality vs. Cost –trade off between quality and price
 Flexibility vs. Speed
 Flexibility vs. Cost
• One way that large facilities with multiple products can address the
issue of tradeoffs is using the concept of plant-within-a-plant (PWP)
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 Order Winners and Qualifiers
• Order qualifiers are those competitive priorities that a company has to meet if it wants
to do business in a particular market.
• Order winners, on the other hand, are the competitive priorities that help a company
win orders in the market
• order winners and order qualifiers change over time.

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 Translating Competitive Priorities into Production Requirements
• Once the competitive priorities have been identified, a plan is developed to
support those priorities.
• The operations strategy will specify the design and use of the
organization’s resources; that is, it will set forth specific operations
requirements.
• These can be broken down into two categories.
1. Structure—Operations decisions related to the design of the production
process, such as characteristics of facilities used, selection of appropriate
technology, and the flow of goods and services through the facility.
2. Infrastructure—Operations decisions related to the planning and control
systems of the operation, such as the organization of the operations
function, the skills and pay of workers, and quality control approaches.
The structure and infrastructure of the production process must be aligned to
enable the company to pursue its long-term plan.
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Why Some Organizations Fail?
• Organizations fail, or perform poorly, for a variety of reasons. Being
aware of those reasons can help managers avoid making similar
mistakes. What are the chief reasons for this?

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Why Some Organizations Fail?

1. Neglecting operations strategy.

2. Failing to take advantage of strengths and opportunities,

and/or failing to recognize competitive threats.

3. Putting too much emphasis on short-term financial

performance at the expense of research and development

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4. Placing too much emphasis on product and service design
and not enough on process design and improvement.

5. Neglecting investments in capital and human resources.

6. Failing to establish good internal communications and

cooperation among different functional areas.

7. Failing to consider customer wants and needs.

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 Competitiveness and Productivity
• Competitiveness
• degree to which a company/ nation can produce goods and services that meet the test
of markets.
• The most common measure of competitiveness is productivity.
• Increase in productivity allow wages to grow without producing inflation, thus
raising standard of living.
• Productivity growth also represents how quickly an economy can expand its capacity
to supply goods and services.
• Productivity
• ratio of output to input
• Output
• sales made, products produced, customers served, meals delivered, or calls answered
• Input
• labor hours, investment in equipment, material usage, or square footage
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Productivity

The most common measure of competitiveness is productivity.

Increases in productivity allow wages to grow without producing
inflation, thus raising the standard of living.
 Productivity is the ratio of outputs (goods and services) divided
by the inputs (resources such as labour and capital)
 Measure of process improvement
 Represents output relative to input
 Only through productivity increases can our standard of living
improve
Productivity = Units produced
Input used

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• Output can be expressed in units or dollars in a variety of
scenarios, such as sales made, products produced,
customers served, meals delivered, or calls answered.
• Single-factor productivity compares output to individual
inputs, such as labor hours, investment in equipment,
material usage, or square footage.
• Multifactor productivity relates output to a combination
of inputs, such as (labor +capital) or (labor + capital +
energy + materials). Capital can include the value of
equipment, facilities, inventory, and land.
• Total factor productivity compares the total quantity of
goods and services produced with all the inputs used to
produce them. These productivity formulas are
summarized in the following Table.

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Measures of Productivity

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When Productivity Increase
• Become efficient
• output increases with little or no increase in input
• Expand
• both output and input grow with output growing more rapidly
• Achieve breakthroughs
• output increases while input decreases
• Downsize
• output remains the same and input is reduced
• Retrench
• both output and input decrease, with input decreasing at a
faster rate

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 Productivity Calculations
Labour Productivity Units produced
Productivity = Labor-hours used

1,000
= = 4 units/labor-hour
250
One resource input  single-factor productivity

Example: Osborne Industries is compiling the monthly productivity

report for its Board of Directors. From the following data, calculate
(a) labor productivity, (b) machine productivity, and (c) the
Multifactor productivity of dollars spent on labor, machine,
materials, and energy. The average Labor rate is $15 an hour, and
the average machine usage rate is $10 an hour.

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Units produced(Out Put) 100,000
Labor hours 10,000
Machine hours 5,000
Cost of materials $35,000
Cost of energy $15,000

Solution
Labor productivity = output = 100,000 = 10units/hour
Labor hours 10,000
Machine productivity = output 100,000 =20 units/hour
Machine hours 5,000
Multifactor productivity = Output
Labor costs + machine costs + material costs + energy
costs
100,000
(10,000x15)+ (5000x10) +35000+15000
= 100,000
250,000
= 0.4 units per dollar spent 29
Assignment
• ABC company produces apple pies sold to supermarkets has
been able to work with its current equipment, to produce 24
pies per bushel of apples. The company currently purchases
100 bushel per day and each gallon requires 3 labors hours to
process. It believes that it can hire a professional food broker,
who can buy better quality apple at the same cost. If this is the
case, it can increase its production to 26 pies per bushel. This
labor hour will have the impact on productivity (pies labor
hours) if the food broker is hired. The professional food broker
works 8 hours per day. Calculate:
1. The current labor productivity
2. Labor productivity with food broker

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End of Chapter
Two!!

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