Operation Management 2023

CHAPTER 2: OPERATIONS STRATEGY FOR COMPETETIVE ADVANTAGE

Chapter Objective
After completing this chapter, you would be able to:
 Know operations strategy;
 identify difference between different types of Operations Strategies
 Understand how to Achieve Competitive Advantage through Operations
1.1. Introduction
Organizations can no longer compete on a single dimension such as low cost, high quality, or
delivery, but must provide all of these (and more) simultaneously. Operations managers must put
in place a strategy to develop and maintain the operations capabilities to support these
competitive objectives, which traditional approaches to strategy do not do. In essence, strategy is
about the ‘how’ of an organization’s aims – how it will go from its current state to its intended
future position.
The concept of strategy originated in military terminology, where strategy refers to plans devised
to outmaneuver the opposition. In business, firms attack where and when other firms are
vulnerable.
1.2. Identifying Missions and Strategies
An effective operations management effort must have a mission so it knows where it is going
and a strategy so it knows how to get there.
a. Mission
Every organization has a mission. We define the organization’s mission as its purpose―what it
will contribute to society. Mission statements provide boundaries and focus for organizations and
the concept around which the firm can rally. The mission states the rationale for the
organization’s existence.
Developing a good strategy is difficult, but it is much easier if the mission has been well defined.
The mission is a statement that answers three overriding questions:
o What business will the company be in (“selling personal computers,” “operating an Italian
restaurant”)?
o Who will the customers be, and what are the expected customers attributes (“homeowners,”
“college graduates”)?
o How will the company’s basic beliefs define the business (“gives the highest customer
service,” “stresses family values”)?
Following is a list of some well-known companies and parts of their mission statements:
Dell Computer Corporation: “to be the most successful computer company in the world”
Delta Air Lines: “worldwide airlines choice”
IBM: “translate advanced technologies into values for our customers as the world’s largest
information service company”

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 Operation Management 2023

b. Strategy
With the mission established, strategy and its implementation can begin. Strategy is an
organization’s action plan to achieve the mission. Each functional area has a strategy for
achieving its mission and for helping the organization reach the overall mission.
These strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses.
Firms achieve missions in three conceptual ways:
i. differentiation,
ii. cost leadership, and
iii. Quick response.
This means operations managers are called on to deliver goods and services that are:
i. better, or at least different,
ii. cheaper, and
iii. more responsive.
Operations managers translate these strategic concepts into tangible tasks to be accomplished.
Any one or combination of these three strategic concepts can generate a system that has a unique
advantage over competitors.
Strategies and Tactics
A mission statement provides a general direction for an organization and gives rise to
organizational goals, which provide substance to the overall mission. For example, one goal of
an organization may be to capture a certain percent of market share for a product; another goal
may be to achieve a certain level of profitability. Taken together, the goals and the mission
establish a destination for the organization.
Strategies are plans for achieving goals. If you think of goals as destinations, then strategies are
the road maps for reaching the destinations. Strategies provide focus for decision-making.
Generally speaking, organizations have overall strategies called organization strategies, which
relate to the entire organization, and they also have functional strategies, which relate to each of
the functional areas of the organization. The functional strategies should support the overall
strategies of the organization, just as the organizational strategies should support the goals and
mission of the organization.
Tactics are the methods and actions used to accomplish strategies. They are more specific in
nature than strategies, and they provide guidance and direction for carrying out actual operations,
which need the most specific and detailed plans and decision-making in an organization. You
might think of tactics as the “how to” part of the process (e.g., how to reach the destination,
following the strategy road map) and operations as the actual “doing” part of the process. It
should be apparent that the overall relationship that exists from the mission down the actual
operations is hierarchical in nature.

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 Operation Management 2023

Fig. 2.1 the hierarchical planning and decision making

Example- Chaltu is a high school student in Shambu Town. She would like to have a career in
business, have a good job, and earn enough income to live comfortably.
A possible scenario for achieving her goals might look something like this:
Mission: Live a good life.
Goal: Successful career, good income.
Strategy: Obtain a university education.
Tactics: Select a university and a major; decide how to finance university.
Operations: Register, buy books, takes courses, study.
Operations Strategy
The organization strategy provides the overall direction for the organization. It is broad in scope,
covering the entire organization. Operation strategy is narrower in scope, deals primarily with
the operations aspect of the organization. Operations strategy relates to products, processes,
methods, operating resources, quality, cost, lead times, and scheduling.
In order for operations strategy to be truly effective, it is important to link it to organization
strategy; that is, the two should not be formulated independently. Rather, formulation of
organization strategy should take into account the realities of operations’ strengths and
weaknesses, capitalizing on strengths and dealing with weaknesses. Similarly, operations
strategy must be consistent with the overall strategy of the organization, and formulated to
support the goals of the organization.
1.3. Strategy Formulation
To formulate an effective strategy, senior management must take into account the distinctive
competencies of the organization, and they must scan the environment. They must determine
what competitors are doing, or planning to do, and take that into account. They must critically

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 Operation Management 2023

examine other factors that could have either positive or negative effects. This is sometimes
referred to as the SWOT approach (strengths, weaknesses, opportunities, and threats).
In formulating a successful strategy, organizations must take into account both order qualifiers,
and order winners.
a. Order qualifiers: Terry Hill describes order qualifiers as those characteristics that potential
customers perceive as minimum standards of acceptability to be considered as a potential for
purchase. However, that may not be sufficient to get a potential customer to purchase from
the organization.
b. Order winners: Order winners are those characteristics of an organization’s goods or
services that cause them to be perceived as better than the competition.
Distinctive competencies:
Distinctive competencies are those special attributes or abilities possessed by an organization
that give it a competitive edge. In effect, distinctive competencies relate to the ways that
organizations compete. These can include price (based on some combination of low costs of
resources such as labor and materials, low operating costs, and low production costs); quality
(high performance or consistent quality); time (rapid delivery or on-time delivery); flexibility
(variety of volume); customer service; and location.
Examples of distinctive competencies:
Competencies
Price Low cost
Quality High-performance design and /or high quality/Consistent quality
Time Rapid delivery or On-time delivery
Flexibility Variety of Volume
Service Superior customer service
Location Convenience
The most effective organizations seem to use an approach that develops distinctive competencies
based on customer needs as on what the competition is doing. Marketing and operations work
closely to match customer needs with operations capabilities. Competitor competencies are
important for several reasons. For example, if a competitor is able to supply high-quality
products, it may be necessary to meet that high quality as a baseline. However, merely matching
a competitor is usually not sufficient to gain market share. It may be necessary to exceed the
quality level of the competitor or gain an edge by excelling in one or more other dimensions,
such as rapid delivery or service after the sale.
Environmental scanning:
Environmental scanning is the considering of events and trends that present threats or
opportunities for the organization.
Generally these include
$ competitors’ activities;
$ changing consumer needs;
$ legal, economic, political, and environmental issues;

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 Operation Management 2023

$ the potential for new markets; and the like.

1.4. Achieving Competitive Advantage through Operations
Each of the three strategies (differentiation, cost leadership, and quick response) provides an
opportunity for operations managers to obtain competitive advantage.
 Competitive advantage:
Competitive advantage implies the creation of a system that has a unique advantage over
competitors. Organizations achieve competitive advantage by providing their customers with
what they want, or need, better or more effectively than competitors and in ways the competitors
find difficult to imitate. The idea is to create customer value in an efficient and sustainable way.
Let us briefly look at how managers achieve competitive advantage via differentiation, low cost,
and response.
a. Competing on Differentiation
Differentiation is concerned with providing uniqueness. In differentiation company selects one
or more attributes that many buyers in an industry perceive as important, and uniquely positions
it to meet those needs.
o Differentiation will cause buyers to prefer the company’s product/service over brands of
rivals.
o An organization pursuing such a strategy can expect higher revenues/margins and enhanced
economic performance.
o The challenge is finding ways to differentiate that create value for buyers and that are not
easily copied or matched by rivals.
o Competitive advantage through differentiation is sustainable if the activities taken to achieve
differentiation are rare and costly to imitate.
o The most appealing types of differentiation strategies are those least subject to quick or
inexpensive imitation.
o Differentiation is most likely to produce an attractive, long-lasting competitive edge when it
is based on technical superiority, quality, giving customers more support services, and on the
core competencies of the organization.
o Differentiation strategy works best when there are many ways to differentiate the
product/service and these differences are perceived by buyers to have value or when buyer
needs and uses the item are diverse.
o The differentiation strategy is more effective when not many rivals are following a similar
type of differentiation approach.
Ways to differentiate products/services include:
 Product features
 Linkage between functions
 Timing
 Location/convenience
 Product mix
 Links with other firms
 Customization
 Product complexity/sophistication
 Marketing (image, etc.)

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 Service and support

Differentiation requires the organization to have some of these skills and resources:
 Strong marketing abilities
 Product engineering
 Creative flair
 Corporate reputation for quality or technological leadership
 Strong cooperation from channels
 Strong coordination among functions
 Amenities to attract highly skilled labour, scientists, or creative people.
b. Competing on Cost
A firm pursuing a cost-leadership strategy attempts to gain a competitive advantage primarily by
reducing its economic costs below that of its competitors. It requires examining each of the
different operation management decisions in a relentless effort to drive down costs while
meeting customer expectations of value. This policy, once achieved, provides high margins and a
superior return on investments.
The ‘low-cost producer’ strategy works best when,
o buyers are large and have significant bargaining power;
o price competition among rival sellers is a dominant competitive force;
o the industry’s product is a standard item readily available from a variety of sellers;
o there are not many ways to achieve product differentiation that have value to the buyer;
and
o when buyers incur low switching costs in changing from one seller to another and are
prone to shop for the best price.
Cost leadership is valuable if:
1. Buyers do not value differentiation very much
2. Buyers are price-sensitive
3. Competitors will not immediately match lower prices
4. There are no changes in
 consumer tastes
 technology
 exogenous prices/costs
Note: A low-cost strategy does not imply low value or low quality.
c. Competing on Response
Response is often thought of as flexible response, but it also refers to reliable and quick response.
Indeed, we define response as including the entire range of values related to timely product
development and delivery, as well as reliable scheduling and flexible performance.
Flexible response may be thought of as the ability to match changes in a market place in which
design innovations and volumes fluctuate substantially.
In practice, these three concepts- differentiation, low cost, and response-are often translated into
six specific strategies:
1. Flexibility in design and volume
2. Low price
3. Delivery

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 Operation Management 2023

4. Quality
5. After-sale service, and
6. A broad product line
1. Flexibility in design and volume: Company environment changes rapidly so that
company must accommodate change by being flexible .Such as
 Product flexibility:-Easily switch production from one item to another, and easily customize
product/service to meet specific requirements of a customer;
 Volume flexibility:-Ability to ramp production up and down to match market demands
2. Low price: offering product at a low price relative to competition.
 Typically high volume products
 Often limit product range & offer little customization
 May invest in automation to reduce unit costs
 Can use lower skill labor
 Probably use product focused layouts
 Low cost does not mean low quality
3. Delivery: Time/speed one of most important competition priorities. First that can deliver
often wins the race. Time related issues involve:
o Rapid delivery: Focused on shorter time between order placement and delivery
o On-time delivery: Deliver product exactly when needed every time.
4. Quality
 Quality is often subjective
 Quality is defined differently depending on who is defining it
 Two major quality dimensions include
 High performance design: Superior features, high durability, & excellent customer
service
 Product & service consistency: Meets design specifications, Close tolerances, and Error
free delivery.
 Quality needs to address
 Product design quality – product/service meets requirements
 Process quality – error free products
5. After-sale service: customers perceive after-sale activities as value-added, such as
delivery, setup, warranty work, and technical support. Or it might involve extra attention

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 Operation Management 2023

while work is in progress, such as courtesy, keeping the customer informed, and attention
to details.
Through these six specific strategies, operation management can increase productivity and
generate a sustainable competitive advantage. Proper implementation of the operations decisions
by operations managers will allow these strategies to be achieved.

1.5. Focused Operations

Four general operations objectives are possible: cost, quality, delivery, and flexibility. Objectives
in operations should be stated in specific quantitative and measurable terms. They are the results
that operations is expected to achieve in the short and long run. Examples of objectives for a
manufacturing company are:
1. Costs: Costs are defined to include the costs of production, costs of carrying inventory, and
any other costs incurred in using resources. The cost of operation includes the cost of labor,
materials, and overhead. These costs are expressed as a percentage of sales or as a unit cost
for particular products.
2. Quality: Quality means the quality of the product or service as perceived by the customer.
Quality is the value of the product, its prestige, and its perceived usefulness. This definition
includes not only conformance to specifications, but the design of the product as well.
3. Deliver: Delivery refers to the ability of operations to deliver the product or service when
and where consumer needs it. Delivery is measured by the ability to quickly process and
make a product when it is needed (throughput time).
4. Flexibility: Flexibility is either the ability to make new products or the time that it takes to
change the volume. If an operation is flexible, new products can be introduced quickly and
volume change can be made rapidly. Flexibility can provide a competitive advantage when
the firm chooses to compete on the basis of new product innovation or quick response to
customer demands. In some cases, however, it may cost more to design and operate and
flexible operation. Then the value of flexibility must be weighed against the added cost.

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 Operation Management 2023

C Compiled by Gemechis J. Dandi Boru College Shambu

Campus