Chapter 2

Strategy and Productivity

Operations Management
by
R. Dan Reid & Nada R. Sanders

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 The Business Strategy
To maintain a competitive position in the marketplace, and
to achieve its objectives, a company must have a long-
range plan. This long-range plan for the whole company is
known as the business strategy.
This strategy is developed after the company has
considered many factors and has made many strategic
decisions. These include developing an understanding of
what business the company is in (the company’s mission),
analyzing the external environment (environmental
scanning) and identifying the company’s strengths (core
competencies).
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 Components of the Business Strategy
These three components are critical to the development
of the company’s long-range plan or business strategy. In
this section, we describe each of these components in
details

1.The mission statement

Every organization must have a mission. The mission
defines the organization, and stresses the purpose of
its existence. The mission is a statement that answers
the following three important questions:

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 The business strategy, continued.
What is our business?
For example: selling personal computers, operating an
Italian restaurant, offering undergraduate and
postgraduate education, etc.
Who are our customers?
For example: secondary education graduates, home
owners, people from age 8 to age 88, etc.
What are our objectives?
For example: offer the highest customer service, stress
family values, be one of the best organizations in this
field, make a reasonable profit, etc.
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The business strategy, continued
Examples on mission statements of some organizations:
a university might describe its mission as discovering and

spreading knowledge and culture.

a bank : protect and increase the value of our customers’

investments.
a manufacturer: supply high quality products to a wide

market while ensuring a satisfactory profit.

a television network: entertain, inform and educate the

widest possible audience.

a furniture company: help customers to improve and enjoy

their homes.

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 The business strategy, continued
2. Environmental Scanning
This is the process of monitoring or examining the external
environment of the company to determine the
opportunities and threats in it. The scanning of the
environment includes the following factors or trends:
political factors (like the political climate in a country,
wars, political instability, international sanctions, etc.)
economic factors (like inflation rate, interest rate,
recession, unemployment rate, etc.)
social factors (like customs and traditions, religion, size
and structure of population, culture, new trends, etc.)
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 The business strategy, continued
legal factors (like the law of the land, commercial law, labor law,
company law, etc.)

technological factors (like new products, new processes, new

information, new soft wares, etc.)

physical factors (factors related to the weather, like hot climate,

cold climate, snow, etc. & factors related to natural disasters like
earthquakes, volcanos, tsunami, drought, hurricanes, etc.)

3. The core competencies

These include the skills and knowledge the company has. They
represent the points of strength that the company will use during the
years of the strategy. Examples are: workforce, facilities, market
understanding, best technologies, financial know-how.
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 The business strategy, continued
A figure showing the components of the business strategy and the supporting
strategies
Mission Environmental scanning Core competencies
Statement that defines what is Monitor the business The skills and knowledge
our business; who are our environment for threats, (the points of strength) that
customers; and what are our opportunities and market can help the company to
objectives and values. trends win in the market.

Business strategy
Defines the long-range plan
for the company

Marketing strategy Operations strategy Finance strategy

Defines the marketing long- Develops the long-range plan Develops the long-range
range plan to support the for the operations function to plan for the finance
business strategy support the business strategy. function

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The business strategy, continued
For a company to succeed, the business
strategy must be supported by strategies made
by each of the individual business functions
such as operations, marketing, and finance.
The strategy made by the operations
management is known as the operations
strategy.

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 The Operations Strategy
The Operations Strategy
It is a long-range plan that specifies the best
use of the company’s resources in producing
the company’s goods and services during the
years of the business strategy.
 It is formulated, by the operations function, within
the guidelines of the business strategy.
 It focuses on developing specific capabilities of the
operations, which give the company a competitive
advantage. These capabilities are called the bases of
competition or the competitive priorities.
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Competitive Priorities
The most common competitive priorities
are Cost, Quality, Time, and Flexibility.
The operations management department
needs to decide on which of these
priorities they are going to compete in
their operations strategy. By excelling in
one of these priorities, a company can
become a winner in the market.
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 Competing on Cost
Competing on costs means offering a product at a low price
relative to the prices of competing products.
To develop this priority, the
operations function could
 Revise the costs structure to see where costs can be
reduced.
 Offer a narrow product range and features.
 Invest in automation to reduce the cost per unit.
 Train employees to maximize their productivity and minimize
scrap and waste.
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Competing on Quality
Quality is a top competitive priority for both producers
and customers. Quality has two major dimensions :

High-performance design:
In designing the product, the operations function
focuses on building superior features of quality like
durability, reliability, performance.
Goods conformance and consistency:
The goods or services produced should meet the exact
design specifications and that they should be the same
each time you buy them.
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Competing on quality, continued
To develop this priority, the company should
 Revise the product design to meet customers needs.
Revise the process design to make sure it produces
zero-defect products.
 Use technology and automation.
View quality as an opportunity to please the customer
not just a way to avoid problems.
 Apply the concepts of TQM.
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 Competing on Time
Time or speed is one of most important competitive
priorities nowadays. Competing on time means
i. developing new products faster than competitors.
ii. delivering products to customers faster(rapid delivery).
iii. delivering products on time
To develop this priority, the company could
Combine or eliminate activities to save time.
Use technology to speed up processes.

Rely on flexible skilled workforce to meet

peak demand periods.

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 Competing on Flexibility
The company’s environment changes rapidly therefore,
the company should have the ability to accommodate
these changes to be flexible.
There are 2 dimensions of flexibility:
 Product flexibility which means:

 The ability to easily add or drop products to

respond to market demand.

 The ability to offer a wide variety of products and

customize them according to the requirements of

customers.

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Competing on Flexibility, continued
Volume flexibility which means:
The ability to rapidly increase or decrease the amount
produced to accommodate changes in demand.

To develop this priority, companies could

i. Use general- purpose equipment that can be used
to make many different kinds of products.

ii. Use higher skilled workforce that can perform many

different tasks to meet customer needs.

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 The Need for Trade-offs
 Operations function needs to give special focus to some
priorities, but not all of them, because of the limited
budget and because some priorities can clash with each
other.
 Companies need to make a trade-off between priorities.
Trade-off means how much you can sacrifice from a
certain priority to gain more from another priority.
 To make a trade-off between priorities, the company
needs to distinguish between order qualifier priorities
and order winner priorities.

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 Order qualifiers and order winners

Order qualifier priorities are the competitive priorities

that a company has to meet to be qualified to do
business in a certain market.
Order winners priorities are the competitive priorities
that help a company to win customer orders in the
market.
For example, when purchasing a mobile, customers may
determine a price range (order qualifier) and then
choose the mobile with the most features (order winner)
within that price range.
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Order qualifiers and order winners, continued

The following are examples on order-winner priorities

of some organizations :
Cost : for economy airlines like Air Arabia and Fly Dubai
Time (or speed): for DHL and Aramex.
Quality: for Ritz Carlton Hotels and Lexus cars.
Flexibility: for Dell computers, customers are given the
choice to select one of several hard drives, processor
chip speed, computer models, and so on.
Also, ordering a suit from a custom tailor than buying a
ready-made suit from a department store.

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 Productivity
Productivity is a measure of how efficiently inputs are
converted to outputs. It is one of the ways by which
companies measure its competitiveness.
Productivity = output/input
There are 3 measures of productivity:
Total Productivity Measure

Total Productivity = output / all inputs

Partial Productivity Measure

Partial Productivity = output/one input

Multifactor Productivity Measure

Multi-factor Productivity = output/ two or more but

not all inputs
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 Example 2.1
Example 2.1 on productivity

For a certain product, the following data were available at the end of the last
financial year:
Cost of materials BD 229,000
Cost of labor BD 262,000
Cost of energy BD 127,000
Other costs BD 22,000
If the number of units sold from this product is 40,000 at a selling price of BD 80
per unit, calculate the following:
a. The total productivity
b. The productivity of labor
c. The multifactor productivity of materials and energy.
d. If the total productivity the year before was 5.8, how much is the
percentage change in the total productivity?
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EXAMPLE 2.1, CONTINUED

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EXAMPL1 2.1, CONTINUED

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EXAMPLE 2.2

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EXAMPLE 2.3

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