Unit Two

Operations Strategy and Competitiveness

The nature of strategy

Strategy: The direction and scope of an organization over the long-term, which achieves
advantage in a changing environment through its configuration of resources with the aim of
fulfilling stakeholder expectations

 It has military origin, used with regard to how a commander might deploy his resources
(i.e. armed forces) throughout a campaign aimed at achieving a particular objective (e.g.
conquering territory or thwarting an invasion).

 The idea that a business organization could have a strategy seems to have first emerged in
the 1960s, when the techniques of long-term business planning were first popularized.

Strategy can be considered to exist at three levels in an organization

1. Corporate level strategy: Corporate level strategy is the highest level of strategy. It sets the
long-term direction and scope for the whole organization. If the organization comprises more
than one business unit, corporate level strategy will be concerned with what those businesses
should be, how resources (e.g. cash) will be allocated between them, and how relationships
between the various business units and between the corporate level and the business units
should be managed. Organizations often express their strategy in the form of a corporate
mission or vision statement.
2. Business level strategy: Business level strategy is primarily concerned with how a particular
business unit should compete within its industry, and what its strategic aims and objectives
should be. Depending upon the organization’s corporate strategy and the relationship
between the corporate level and its business units, a business unit’s strategy may be
constrained by a lack of resources or strategic limitations placed upon it by the corporate
strategy. In single business organizations, business level strategy is synonymous with
corporate level strategy.
3. Functional level strategy: The bottom level of strategy is that of the individual function
(operations, marketing, finance, etc.) These strategies are concerned with how each function
contributes to the business strategy, what their strategic objectives should be and how they
should manage their resources in pursuit of those objectives.
Operations strategy is concerned with setting broad policies and plans for using the resources
of the firm to best support the firm’s long-term competitive strategy. It has a long-term impact
on the nature and characteristics of the organization. In large measure, strategies affect the
ability of and organization to compete.
The Role of Operations Strategy:

• Provide a plan that makes best use of resources which;

– Specifies the policies and plans for using organizational resources

– Supports Business Strategy

Business/Functional Strategy

Importance of Operations Strategy

• Companies often do not understand the differences between operational efficiency and strategy

– Operational efficiency is performing tasks well, even better than competitors

– Strategy is a plan for competing in the marketplace

• Operations strategy is to ensure all tasks performed are the right tasks
Developing a Business Strategy

• A business strategy is developed after taking into many factors and following some
strategic decisions such as;

– What business is the company in (mission)

– Analyzing and understanding the market (environmental scanning)

– Identifying the company’s strengths (core competencies)

Three Inputs to a Business Strategy

MISSION AND STRATEGIES

 An organization’s mission is the reason for its existence. It is expressed in its mission
statement. For a business organization, the mission statement should answer the question
“What business are we in?” Missions vary from organization to organization, depending on the
nature of their business. A mission statement serves as the basis for organizational goals,
which provide more detail and describe the scope of the mission. The mission and goals often
relate to how an organization wants to be perceived by the general public, and by its employees,
suppliers, and customers. Goals serve as a foundation for the development of organizational
strategies.

These, in turn, provide the basis for strategies and tactics of the functional units of the
organization. Organizational strategy is important because it guides the organization by
providing direction for, and alignment of, the goals and strategies of the functional units.
Moreover, strategies can be the main reason for the success or failure of an organization.

There are three basic business strategies: • Low cost. • Responsiveness. • Differentiation
from competitors. Responsiveness relates to ability to respond to changing demands.
Differentiation can relate to product or service features, quality, reputation, or customer service.
Some organizations focus on a single strategy while others employ a combination of strategies.
One company that has multiple strategies is A mazon.com. Not only does it offer low cost and
quick, reliable deliveries, it also excels in customer service.

Strategies and Tactics. If you think of goals as destinations, then strategies are the roadmaps for
reaching the destinations. Strategies provide focus for decision making. Generally speaking,
organizations have overall strategies called organizational strategies, which relate to the entire
organization. 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 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 roadmap) and operations as the actual “doing” part of the process. It should be
apparent that the overall relationship that exists from the mission down to actual operations is
hierarchical.

Example; Marneshi Gojjam is a high school student in Bahr Dar. 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 college education.

Tactics: Select a college and a major; decide how to finance college.

Operations: Register, buy books, take courses, study.

Here are some examples of different strategies an organization might choose from: Low cost.
Outsource operations to third-world countries that have low labor costs.

Scale-based strategies. Use capital-intensive methods to achieve high output volume and low
unit costs.

Specialization. Focus on narrow product lines or limited service to achieve higher quality.

Newness. Focus on innovation to create new products or services.

Flexible operations. Focus on quick response and/or customization.

High quality. Focus on achieving higher quality than competitors.

Service. Focus on various aspects of service (e.g., helpful, courteous, reliable, etc.).
Sustainability. Focus on environmental-friendly and energy-efficient operations.

A wide range of business organizations are beginning to recognize the strategic advantages of
sustainability, not only in economic terms, but also in promotional benefit by publicizing their
sustainability efforts and achievements.

Core competencies the special attributes or abilities that give an organization a competitive
edge.
Strategy Formulation

Strategy formulation is almost always critical to the success of a strategy. To formulate an

effective strategy, senior managers must take into account the core competencies of the
organizations, 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 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). Strengths and weaknesses have an
internal focus and are typically evaluated by operations people. Threats and opportunities have
an external focus and are typically evaluated by marketing people. SWOT is often regarded as
the link between organizational strategy and operations strategy. In formulating a successful
strategy, organizations must take into account both order qualifiers and order winners. Order
qualifiers are those characteristics that potential customers perceive as minimum standards of
acceptability for a product to be considered for purchase. However, that may not be sufficient to
get a potential customer to purchase from the organization. Order winners are those
characteristics of an organization’s goods or services that cause them to be perceived as better
than the competition. Characteristics such as price, delivery reliability, delivery speed, and
quality can be order qualifiers or order winners. Thus, quality may be an order winner in some
situations, but in others only an order qualifier. Over time, a characteristic that was once an order
winner may become an order qualifier, and vice versa. Obviously, it is important to determine
the set of order qualifier characteristics and the set of order winner characteristics. It is also
necessary to decide on the relative importance of each characteristic so that appropriate attention
can be given to the various characteristics. Marketing must make that determination and
communicate it to operations. Environmental scanning is the monitoring of events and trends
that present either threats or opportunities for the organization. Generally these include
competitors’ activities; changing consumer needs; legal, economic, political, and environmental
issues; the potential for new markets; and the like. Another key factor to consider when
developing strategies is technological change, which can present real opportunities and threats to
an organization. Technological changes occur in products (high-definition TV, improved
computer chips, improved cellular telephone systems, and improved designs for earthquake-
proof structures); in services (faster order processing, faster delivery); and in processes (robotics,
automation, computer-assisted processing, point of-sale scanners, and flexible manufacturing
systems). The obvious benefit is a competitive
Important factors may be internal or external. The following are key external factors:

1. Economic conditions. These include the general health and direction of the economy,
inflation and deflation, interest rates, tax laws, and tariffs.

2. Political conditions. These include favorable or unfavorable attitudes toward business,

political stability or instability, and wars.

3. Legal environment. This includes antitrust laws, government regulations, trade restrictions,
minimum wage laws, product liability laws and recent court experience, labor laws, and patents.

4. Technology. This can include the rate at which product innovations are occurring, current
and future process technology (equipment, materials handling), and design technology.

5. Competition. This includes the number and strength of competitors, the basis of
competition (price, quality, special features), and the ease of market entry.

6. Markets. This includes size, location, brand loyalties, ease of entry, potential for growth,
long-term stability, and demographics.

The organization also must take into account various internal factors that relate to possible
strengths or weaknesses. Among the key internal factors are the following:

1. Human resources. These include the skills and abilities of managers and workers; special
talents (creativity, designing, problem solving); loyalty to the organization; expertise; dedication;
and experience.

2. Facilities and equipment. Capacities, location, age, and cost to maintain or replace can have
a significant impact on operations.

3. Financial resources. Cash flow, access to additional funding, existing debt burden, and cost
of capital are important considerations.

4. Customers. Loyalty, existing relationships, and understanding of wants and needs are
important.

5. Products and services. These include existing products and services, and the potential for
new products and services.
 6. Technology. This includes existing technology, the ability to integrate new technology, and
the probable impact of technology on current and future operations.

7. Suppliers. Supplier relationships, dependability of suppliers, quality, flexibility, and service

are typical considerations.

8. Other. Other factors include patents, labor relations, company or product image, distribution
channels, relationships with distributors, maintenance of facilities and equipment, access to
resources, and access to markets.

After assessing internal and external factors and an organization’s distinctive competence, a
strategy or strategies must be formulated that will give the organization the best chance of
success. Among the types of questions that may need to be addressed are the following:

What role, if any, will the Internet play?

Will the organization have a global presence?

To what extent will outsourcing be used?

What will the supply chain management strategy be?

To what extent will new products or services be introduced?

What rate of growth is desirable and sustainable?

What emphasis, if any, should be placed on lean production?

How will the organization differentiate its products and/or services from competitors’?

The organization may decide to have a single, dominant strategy (e.g., be the price leader) or to
have multiple strategies. A single strategy would allow the organization to concentrate on one
particular strength or market condition. On the other hand, multiple strategies may be needed to
address a particular set of conditions. Many companies are increasing their use of outsourcing to
reduce overhead, gain flexibility, and take advantage of suppliers’ expertise. Dell Computers
provides a great example of some of the potential benefits of outsourcing as part of a business
strategy. Growth is often a component of strategy, especially for new companies. A key aspect
of this strategy is the need to seek a growth rate that is sustainable. Companies increase their risk
of failure not only by missing or incomplete strategies; they also fail due to poor execution of
strategies. And sometimes they fail due to factors beyond their control, such as natural or man-
made disasters, major political or economic changes, or competitors that have an overwhelming
advantage (e.g., deep pockets, very low labor costs, less rigorous environmental requirements). A
useful resource on successful business strategies is the Profit Impact of Market Strategy (PIMS)
database (w ww.pimsonline.com) . The database contains profiles of over 3,000 businesses
located primarily in the United States, Canada, and western Europe. It is used by companies and
academic institutions to guide strategic thinking. It allows subscribers to answer strategy
questions about their business. Moreover, they can use it to generate benchmarks and develop
successful strategies.

STRATEGY FORMULATION

The key steps in strategy formulation are:

1. Link strategy directly to the organization’s mission or vision statement.

2. Assess strengths, weaknesses, threats and opportunities, and identify core competencies. 3.
Identify order winners and order qualifiers.

4. Select one or two strategies (e.g., low cost, speed, customer service) to focus on.

Supply Chain Strategy specifies how the supply chain should function to achieve supply chain
goals. The supply chain strategy should be aligned with the business strategy. If it is well
executed, it can create value for the organization. It establishes how the organization should
work with suppliers and policies relating to customer relationships and sustainability. Supply
chain strategy is covered in more detail in a later chapter.

Sustainability Strategy Society is placing increasing emphasis on corporate sustainability

practices in the form of governmental regulations and interest groups. For these and other
reasons, business organizations are or should be devoting attention to sustainability goals. To be
successful, they will need a sustainability strategy. That requires elevating sustainability to the
level of organizational governance; formulating goals for products and services, for processes,
and for the entire supply chain; measuring achievements and striving for improvements; and
possibly linking executive compensation to the achievement of sustainability goals.

Global Strategy As globalization increased, many companies realized that strategic decisions
with respect to globalization must be made. One issue companies must face is that what works in
one country or region will not necessarily work in another, and strategies must be carefully
crafted to take these variabilities into account. Another issue is the threat of political or social
upheaval. Still another issue is the difficulty of coordinating and managing far-flung operations.
Indeed, “In today’s global markets, you don’t have to go abroad to experience international
competition. Sooner or later the world comes to you.”

OPERATIONS STRATEGY

The organization strategy provides the overall direction for the organization. It is broad in
scope, covering the entire organization. Operations strategy is narrower in scope, dealing
primarily with the operations aspect of the organization. Operations strategy relates to products,
processes, methods, operating resources, quality, costs, lead times, and scheduling. Operations
strategy can have a major influence on the competitiveness of an organization. If it is well
designed and well executed, there is a good chance that the organization will be successful; if it
is not well designed or executed, the chances are much less that the organization will be
successful.

Productivity in the Service

Service Sector productivity is more problematic than manufacturing productivity. In many

situations, it is more difficult to measure, and thus to manage, because it involves intellectual
activities and a high degree of variability.

Examples from Strategies

• 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 know-how, logistics

Developing an Operations Strategy

• Operations Strategy is a plan for the design and management of operations functions

• Operation Strategy developed after the business strategy

 • Operations Strategy focuses on specific capabilities which give it a competitive edge –
competitive priorities

Operations Strategy – Designing the Operations Function

Operations strategy and competitiveness

Competitiveness: How effectively an organization meets the wants and needs of customers
relative to others that offer similar goods or services. Business organizations compete through
some combination of their marketing and operations functions.
Marketing influences competitiveness in several ways, including identifying consumer wants
and needs, pricing, and advertising and promotion.
. Identifying consumer wants and/or needs is a basic input in an organization’s decision
making process, and central to competitiveness. The idea is to achieve a perfect match between
those wants and needs and the organization’s goods and/or services.
2. Price and quality are key factors in consumer buying decisions. It is important to understand
the trade-off decision consumers make between price and quality.
3. Advertising and promotion are ways organizations can inform potential customers about
features of their products or services, and attract buyers.
Operations has a major influence on competitiveness through product and service design, cost,
location, quality, response time, flexibility, inventory and supply chain management, and service.
Many of these are interrelated.
1. Product and service design should reflect joint efforts of many areas of the firm to achieve a
match between financial resources, operations capabilities, supply chain capabilities, and
consumer wants and needs. Special characteristics or features of a product or service can be a
key factor in consumer buying decisions. Other key factors include innovation and the time-to-
market for new products and services.
2. Cost of an organization’s output is a key variable that affects pricing decisions and profits.
Cost-reduction efforts are generally ongoing in business organizations. Productivity is an
important determinant of cost. Organizations with higher productivity rates than their
competitors have a competitive cost advantage. A company may outsource a portion of its
operation to achieve lower costs, higher productivity, or better quality.
3. Location can be important in terms of cost and convenience for customers. Location near
inputs can result in lower input costs. Location near markets can result in lower transportation
costs and quicker delivery times. Convenient location is particularly important in the retail
sector.
4. Quality refers to materials, workmanship, design, and service. Consumers judge quality in
terms of how well they think a product or service will satisfy its intended purpose.
Customers are generally willing to pay more for a product or service if they perceive the product
or service has a higher quality than that of a competitor.
5. Quick response can be a competitive advantage. One way is quickly bringing new or
improved products or services to the market. Another is being able to quickly deliver existing
products and services to a customer after they are ordered, and still another is quickly handling
customer complaints.
6. Flexibility is the ability to respond to changes. Changes might relate to alterations in design
features of a product or service, or to the volume demanded by customers, or the mix of products
or services offered by an organization. High flexibility can be a competitive advantage in a
changeable environment.
7. Inventory management can be a competitive advantage by effectively matching supplies of
goods with demand.
8. Supply chain management involves coordinating internal and external operations (buyers
and suppliers) to achieve timely and cost-effective delivery of goods throughout the system.
9. Service might involve after-sale activities customers perceive as value-added, such as
delivery, setup, warranty work, and technical support. Or it might involve extra attention while
work is in progress, such as courtesy, keeping the customer informed, and attention to details.
Service quality can be a key differentiator; and it is one that is often sustainable.
Moreover, businesses rated highly by their customers for service quality tend to be more
profitable, and grow faster, than businesses that are not rated highly.
10. Managers and workers are the people at the heart and soul of an organization, and if they
are competent and motivated, they can provide a distinct competitive edge by their skills and the
ideas they create. One often overlooked skill is answering the telephone.
How complaint calls or requests for information are handled can be a positive or a negative.
If a person answering is rude or not helpful, that can produce a negative image. Conversely, if
calls are handled promptly and cheerfully, that can produce a positive image and, potentially, a
competitive advantage.

Competitive Priorities- The Edge

Companies must be competitive to sell their goods and services in the market place. Competitiveness is
an important factor in determining whether a company prospers, barely gets by, or fails.

• Four Important Operations Questions: Will you compete on –

Cost?

Quality?

Time?

Flexibility?

Competing on Cost?
• 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

– Low cost does not mean low quality

Competing on 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

• Error free delivery

• Quality needs to address

– Product design quality – product/service meets requirements

Process quality – error free products

Competing on Time?

• Time/speed one of most important competition priorities

• First that can deliver often wins the race

• Time related issues involve

– Rapid delivery:

• Focused on shorter time between order placement and delivery

 – On-time delivery:

• Deliver product exactly when needed every time

Competing on Flexibility?

• Company environment changes rapidly

• Company must accommodate change by being flexible

– Product flexibility:

• Easily switch production from one item to another

• Easily customize product/service to meet specific requirements of a

customer

– Volume flexibility:

• Ability to ramp production up and down to match market demands

New Strategies

• Traditional strategies of business organizations have tended to emphasize cost

minimization or product differentiation. While not abandoning these strategies, many
organizations are adopting new strategies that are based on quality and/or time.

1. Time Based Strategies

This strategy focus on reducing the time required to accomplish various activities such as

 The time taken to develop new products or services and to market them,

 The time needed to respond to a change in customer demand, or

 The time needed to deliver a product or perform a service).

By doing so, organizations seek to improve service to the customer, and to gain a competitive
advantage over rivals who take more time to accomplish the same tasks.

Some of the areas in which organizations have achieved time reduction are:

 Planning time
 Product/service design time
  Processing time
 Change over time
 Delivery time
 Response time for complaints.
2. Quality-based Strategies (will be discussed in later chapters)
This strategy focuses on satisfying the customer by integrating quality in to all phases of the organization.
This includes not only the final product or service that is provided to the customer, but also the processes
related to the design, production, or service after the sale.