CHAPTER

Operations Strategy
& Competitiveness 2

Reid & Sanders, Operations Management

© Wiley 2002
 Learning Objectives

• Define the role of business strategy

• Explain strategy development
• Explain the role of an operations strategy
• Explain the relationship between the business &
operations strategy
• Describe how an operations strategy is developed
• Identify competitive priorities
• Define productivity & identify productivity measures
• Compute productivity measures

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The Role of Business Strategy

• Business Strategy:
– The firm’s long-range plan based on an
understanding of the marketplace
– Defines how a company intends to
differentiate itself from competitors
– Individual employees & functional units use
the strategy to align their efforts with each
other to accomplish the overall game plan

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 Operations Strategy

• OM Strategy:
– The long-range plan for the design & use of the operations function to
support the overall business strategy:
• The location, size, & type of facilities
• The worker skills & talents required
• The technology & processes to be used
• How product & service quality will be controlled
– Operating efficiency  an operating strategy
– Operational efficiency is a measure of how much costs are incurred during a given economic or
financial activity, where lower costs equals greater efficiency. For investors and traders, markets
exhibit operational efficiency when transaction costs are low.
– Operational strategies refers to the methods companies use to reach their objectives. By
developing operational strategies, a company can examine and implement effective and efficient
systems for using resources, personnel and the work process.

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 Developing a
Business Strategy
• Mission:
– A statement defining what business the firm is in, who its
customers are, & how its core beliefs shape its decision-
making
• Environmental scanning:
– Monitoring the external environment for market opportunities
& competitive threats & markets new trend
like(technologies , economic, politics)
• Core competencies:
– Internal strengths & weaknesses of the firm (e.g.: personnel
with special expertise, access to unique technology, & things
the firm does better than competitors)
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 Core competencies

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 Putting it all Together

Environmental Mission: Core

Scanning: Statement that defines Competencies:
Monitoring the What our business is; Our unique strengths
business environment Who our clients are; that help us win in the
for market trends, and How our values marketplace
threats, and define our business
opportunities

Business Strategy:
Defined long-range plan
for the company
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 Developing an
Operations Strategy
• Identify the competitive priorities required to support
the business strategy:
• Common priorities include:
– Cost: low production costs enables the company to price its product
below competitors
– e.g. Economical airlines.
– Quality: higher performance or a more consistent product can support
a price premium
– e.g. McDonald’
– Time: faster delivery or consistent on-time delivery can support a price
premium
e.g. FedEx, DHL, UPS.
– Flexibility: highly customized products or volume flexibility can
support a price premium
e.g. custom tailor to buying it off the rack at a retailer, Fine restaurant vs. fast food restaurant.

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Translate Priorities into Design

Business Strategy

Operations Strategy:
Based on Competitive Priorities

Design of Operations:
Structure & Infrastructure

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 Design of Operations
• Structure:
– Facilities
– Flow of work
– Technology
• Structure
• Operations decisions related to the design of the production process, such as
facilities, technology, and flow of goods and services through the facility.
• Infrastructure:
– Planning & control systems
– Work design & compensation
• Infrastructure
• Operations decisions related to the planning and control systems of the
operation, such as organization of operations, skills and pay of workers, and
quality measures.
• e.g: Dell Corporation, less than 15 minutes, no intermediaries.

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 Competing on Low Cost

• Eliminate wasted labor, materials, and

facilities
• Emphasize efficient processes & high
productivity
• Often limit the product range & offer
little customization
• May invest in automation to increase
productivity
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 Competing on Quality

• High performance design:

– Superior features, high durability, &
excellent customer service
• Product & service consistency:
– Error free delivery
– Close tolerances

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 Competing on Time

• Rapid delivery:
– How quickly an order is received after the
order is placed
• On-time delivery:
– Sometimes items can arrive too quickly
• JIT firms try to avoid clutter of excess inventory
– Ability to deliver exactly when expected
• Not too early or too late

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 Competing on Flexibility

• Product flexibility:
– Easily switch the production process from
one item to another (substitution)
– Easily customize output to meet the
specific requirements of a customer
• Volume flexibility:
– Rapidly increase or decrease the amount
of product being produced to match
demand
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 Understand Tradeoffs
Example: Made-to-Order Pizza
QUALITY & DESIGN
QUALITY FLEXIBILITY

Fresh, Natural

Crust Choice
Ingredients

Toppings &
Slow to Cook

Low Volume
Ingredients
Expensive

Ovens
COST TIME VOLUME
FLEXIBILITY
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 Distinguish Order Qualifiers
from Order Winners
• Order Qualifiers:
– Competitive priorities that a product must meet to even be
considered for purchase
– Generally, represented by features shared by all competitors in a
given market niche
Consider a simple restaurant that makes and delivers pizzas. Order qualifiers might be low price (say, less than $10.00)
and quick delivery (say, under 15 minutes) because this is a standard that has been set by competing pizza restaurants.

• Order Winners:
– Competitive priorities that distinguish the firm’s offerings from
competitors & ultimately win the customer’s order.

The order winners may be “fresh ingredients” and “home-made taste.”

• They changed over time (price vs. quality) (automobile war Japan vs. USA)

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 Productivity

You can’t manage what you can’t measure.

Edward Dimming.

Outputs
P Inputs

Inputs
Efficiency

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 Productivity Measures

• Partial Measures:
– A ratio of outputs to only one input (e.g.: labor
productivity, machine utilization, energy efficiency)
• Multifactor Measures:
– A ratio of outputs to several, but not all, inputs
• Total Productivity Measures:
– The ratio of outputs to all inputs

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 Labor Productivity

Example:
– Assume two workers paint twenty-four tables in
eight hours:
– Inputs: 16 hours of labor (2 workers x 8 hours)
– Outputs: 24 painted tables

Outputs 24 tables
  1.5 tables / hour
Inputs 16 hours

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 Multifactor Productivity

• Convert all inputs & outputs to $ value

• Example:
– 200 units produced sell for $12.00 each
– Materials cost $6.50 per unit
– 40 hours of labor were required at $10 an hour

200 units  $12 / unit $2400

  1.41
200 units  $6.50 / unit   40 hours  $10 / hour  $1700

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Interpreting Productivity Measures

• Is the productivity measure of 1.41 in

the previous example good or bad?
• Can’t tell without a reference point
• Compare to previous measures (e.g.:
last week) or to another benchmark

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 Productivity Growth Rate

• Can be used to compare a process’

productivity at a given time (P2) to the
same process’ productivity at an earlier
time (P1)
P2  P1
Growth Rate 
P1

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 Productivity Growth Rate
Example:
– Last week a company produced 150 units using 200 hours of labor
– This week, the same company produced 180 units using 250 hours of labor

150 units
P1   0.75 units / hour
200 hours
180 units
P2   0.72 units / hour
250 hours
P  P 0.72  0.75
Growth Rate  2 1   0.04
P1 0.75
or a negative 4% growth rate
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 The End

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