Chapter 2 - Operations Strategy

and Competitiveness
1

Operations Management
6th Edition
R. Dan Reid & Nada R. Sanders

Copyright © 2016 John Wiley & Sons, Inc.

 Learning Objectives
2

Explain the role of operations strategy in the

organization.
Explain how a business strategy is developed.
Describe how an operations strategy is developed.
Explain the strategic role of technology.
Define productivity and identify productivity measures.

Copyright © 2016 John Wiley & Sons, Inc.

 The Role of Operations Strategy
3

Provides a plan that makes best use of resources

and:
 Specifies the policies and plans for using organizational
resources
 Supports Business Strategy - an organizations long range plan
(see graph on next slide)

Copyright © 2016 John Wiley & Sons, Inc.

Business/Functional Strategy
4

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Importance of Operations Strategy
5

Essential differences between operational

efficiency and strategy:
 Operational efficiency is performing tasks well, or better than
competitors
 Strategy is a plan for competing in the marketplace
Operations strategy ensures all tasks performed are
the right tasks

Copyright © 2016 John Wiley & Sons, Inc.

Developing a Business Strategy
6

Consider these three critical factors in developing a

business strategy:
 What is the business goal? (mission)
 Does company understand the market? (environmental
scanning)
 What are the company strengths? (core competencies)

Copyright © 2016 John Wiley & Sons, Inc.

Core Competencies
7

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Creating the Business Strategy
8

Copyright © 2016 John Wiley & Sons, Inc.

 Examples of Key Factors
9

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 abilities, logistics

Copyright © 2016 John Wiley & Sons, Inc.

 Developing an Operations Strategy
10

Operations Strategy:
Is a plan for the design and management of
operations functions
Is developed after the business strategy
Focuses on specific capabilities which give it a
competitive edge – competitive priorities

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Designing the Operations Function
11

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 Competitive Priorities – The Edge
12

Four Key Operations Questions - Can a company compete

on:
1. Cost?
2. Quality?
3. Time?
4. Flexibility?
All of the above? Some? Tradeoffs?

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 1. Competing on Cost
13

Offer product at lower price than competition

 Typically high volume products
 Often limit product range with little customization
 May invest in automation to increase productivity
 Might offer extra training to employees
 Focus on cutting costs and eliminating waste
 Low cost does not mean low quality

Copyright © 2016 John Wiley & Sons, Inc.

 2. Competing on Quality
14

Quality is often subjective & is defined differently depending on

who is defining it
Two major quality dimensions include
1. High performance design:
 Superior features, high durability, & excellent customer service
2. Product & service consistency:
 Meets design specifications
 Close tolerances
 Error free delivery
Quality must address
 Product design quality – product/service meets requirements
 Process quality – error free products

Copyright © 2016 John Wiley & Sons, Inc.

 3. Competing on Time
15

Time/speed a top competitive priority

First to deliver often wins the race

Time-related issues involve:

 Rapid and/or on-time delivery
 Focused on shorter time between order placement and delivering
product exactly when needed every time

Copyright © 2016 John Wiley & Sons, Inc.

 4. Competing on Flexibility
16

Business environments can change rapidly;

company’s must accommodate change by being
flexible
 Product flexibility:
 Offer a wide variety of goods/services, easily customized to meet
specific requirements of customer
 Easily drop or add product to meet customer demand
 Volume flexibility:
 Ability to rapidly increase or decrease production to match market
demands

Copyright © 2016 John Wiley & Sons, Inc.

 The Need for Trade-offs
17

Decisions
 must emphasize priorities that support business strategy
 often required trade-offs
 must focus on order qualifiers and order winners

Copyright © 2016 John Wiley & Sons, Inc.

 Order Qualifiers & Winners
18

Which priorities are “Order Qualifiers”?

Hint: Must meet market’s competitive
priorities since market expects it

Which priorities are “Order Winners”?

Hint: Dell competes on all four priorities
Southwest Airlines competes on cost
McDonald’s competes on consistency
FedEx competes on speed
Pizzerias compete on homemade taste

Copyright © 2016 John Wiley & Sons, Inc.

 Translating Competitive Priorities into Production
Requirements
19

Structure decisions related  Infrastructure decisions

to the production process: related to planning &
 characteristics of facilities control systems of
used operations:
 selection of appropriate  organization of operation
technology function
 flow of goods and services  skill/pay of workers
 quality control approaches

Copyright © 2016 John Wiley & Sons, Inc.

 Example: Dell Computer
20

Structure & Infrastructure

 Focus on customer service, cost, and speed
 ERP system allows customers to order directly from Dell

 Product design and assembly line allow a “make to order”

strategy – lowers costs, increases turns
 Suppliers ship components to a warehouse within 15
minutes of the assembly plant - VMI
 Dell set up a shipping arrangement with UPS

Copyright © 2016 John Wiley & Sons, Inc.

 Strategic Role of Technology
21

Technology must support competitive priorities

Three Types of Technology Applications:

1. Product Technology – (New technology)

Examples: Teflon, CD’s, fiber optic cable

2. Process Technology – (Improves process)

Examples: flexible automation, CAD, CAM

3. Information Technology – (Enables communication)

Examples: POS, EDI, ERP, B2B

Copyright © 2016 John Wiley & Sons, Inc.

Technology as a Tool for Competitive Advantage
22

Positive Potential Negative Potential

Benefits Risks
 Improve processes  Costly
 Maintain up-to-date  Can overstate benefits
standards  Obsolescence
 Gain competitive
advantage

Copyright © 2016 John Wiley & Sons, Inc.

Technology as a Tool for Competitive Advantage
23

Technology at Its Best:

 Supports competitive priorities
 Can require change to strategic plans
 Can require change to operations strategy

Technology is a crucial strategic decision

Copyright © 2016 John Wiley & Sons, Inc.

 Measuring Productivity
24

 Productivity is a measure of how efficiently inputs are

converted to outputs Productivity = Output/input

 Total Productivity Measure

Total Productivity = Output produced/All inputs used

 Partial Productivity Measure

Partial Productivity = Output/labor or Output/Capital

 Multifactor Productivity Measure

Multi-factor Productivity = Output/labor + Materials

Copyright © 2016 John Wiley & Sons, Inc.

Measuring Productivity
25

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Productivity Examples
26

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Productivity Examples
27

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Interpreting Productivity Measures
28

 Productivity measures must be compared to something, i.e.,

another year, a different company
 Raw productivity calculations do not tell the complete story
unless there are no major structure differences.
 In the prior automobile business example, it is obvious that
some major changes were taking place to yield 15.8% and
13.7% year-to-year cars/employee productivity
improvements. What changes could improve car sales per
employee? Automation? Outsourcing? Major re-design?

Copyright © 2016 John Wiley & Sons, Inc.

 Interpreting Productivity Measures
29

Other productivity measure questions:

 Is this partial productivity measurement enough to make
an investment decision?
 Is the Total Cost Productivity measure a better reflection
of year to year productivity at 4.2% and 1.6%. Why?
 Should you also look at productivity measures for the two
major competitors for comparison?

Productivity measure provides information on how

the firm is doing relative to what is critical to the
firm

Copyright © 2016 John Wiley & Sons, Inc.

 Productivity and Competitiveness
30

Productivity is a scorecard on effective resource use

 A nation’s Productivity directly related to standard of
living
 US productivity growth averaged 2.8% from
1948-1973
 Productivity growth slowed for the next 25 years to 1.1%
 Productivity growth in service industries has been less
than in manufacturing

Copyright © 2016 John Wiley & Sons, Inc.

Changes in U.S. Productivity
31

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Productivity and the Service Sector
32

Measuring service sector productivity is a unique

challenge
 Traditional measures focus on tangible outcomes
 Service industries primarily produce intangible outcomes
 Measuring intangibles is challenging

Copyright © 2016 John Wiley & Sons, Inc.

 Operations Strategy within OM
33

Strategic decisions of firm drive tactical decisions

Business strategy defines long-term plan
Operations strategy support the business strategy
Marketing strategy needs to fully understand operations
capability
Financial plans in effect support operations activities.

Copyright © 2016 John Wiley & Sons, Inc.

 Chapter 2 Highlights
34

 Business Strategy is a long range plan and vision. Each

individual business function needs to support the business
strategy.
 An organization develops its business strategy by doing
environmental scanning and considering its mission and its core
competencies.
 The role of operations strategy is to provide a long-range plan for
the use of the company’s resources in producing the company’s
primary goods and services.
 The role of business strategy is to serve as an overall guide for
the development of the organization’s operations strategy.

Copyright © 2016 John Wiley & Sons, Inc.

 Chapter 2 Highlights
35

 The operations strategy focuses on developing specific

capabilities called competitive priorities.
 There are four categories of competitive priorities: cost, quality,
time, and flexibility.
 Technology can be used by companies to gain a competitive
advantage and should be acquired to support the company’s
chosen competitive priorities.
 Productivity is a measure that indicates how efficiently an
organization is using its resources.
 Productivity is computed as the ratio or organizational outputs
divided by inputs.

Copyright © 2016 John Wiley & Sons, Inc.