Chapter Two

Operations strategy and

Competitiveness
• Sample

The New Spirit of Africa

Cost based competition

Service based Competition

 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 is in
business activities –choosing
to perform activities
differently than rivals;
otherwise a strategy is no
thing more than a marketing
slogan that will not
withstand competition.
Operations strategy and competitiveness cont’d…
• 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.
 Cont’d…
• Strategy is how the mission of a company is
accomplished.
• It unites an organization, provides consistency in
decisions, and keeps the organization moving in the right
direction.
• 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.
 Cont’d…

Relationship between the business strategy and the functional strategy

 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
 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.
 Cont’d…

Operations strategy and the design of the operations function

 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
 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.
 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.
 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.
 Cont’d…

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.
• 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.
 Cont’d…

3. Time or 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.
• 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.
 Cont’d…

4. Flexibility -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
• flexible companies often offer greater customer service and can
meet unique customer requirements
• Operations focus in flexible companies :
 more general-purpose equipment that can be used to make
many different kinds of products.
workers tend to have higher skill levels and can often perform
many different tasks in order to meet customer needs.
 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)
 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.
 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.
 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
 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
• 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
 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
 Productivity Calculations One resource input
Example of single factor productivity
A furniture company is trying to determine their labour
productivity for the week from the following data given
below
Units produced 1,000 tables
Labour hours 250 and Labour rate $ 12/hr
Units produced
Productivity = Labour-hours used
1,000
= = 4 units/labour-hour
250
If asked in terms of Dollar value or money spent
1,000
= 0.3units per dollars spent
250(12)
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.

Units produced 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
(10000x15)+ (5000x10) +35000+15000
= 100,000
250,000
= 0.4 units per dollar spent

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