MBA 512: OPERATIONS

MANAGEMENT
Chapter 2: Strategy

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 LEARNING OBJECTIVES
 Knowwhat a sustainable business strategy is and how it relates to operations
management.

 Define operations strategy.

 Explain how operations strategies are implemented.

 Understand why strategies have implications relative to business risk.

 Evaluate productivity in operations management.

CLIFF BAR
 COMPANY ASPIRATIONS BEYOND MAKING A
PROFIT
 Cliff Bar’s Aspirations
 Sustaining our Planet—Keep our impact on the planet small, even as we
grow.
 Sustaining our Community—Be good neighbors. Give back to the
community.
 Sustaining our People— Create an environment where people can live life to
the fullest, even from 9 to 5.
 Sustaining our Business—Grow slower, grow better, and stick around longer.

 Sustaining our Brands—Make what people actually need. Never compromise

quality.
 SUSTAINABLE STRATEGY
 The firm’s strategy describes how it will create and sustain value for its current
shareholders.
 Shareholders – individuals or companies that legally own one or more shares of stock
in the company.
 Stakeholders – individuals or organizations who are directly or indirectly influenced
by the actions of the firm.

 Adding a sustainability requirement means meeting value goals without compromising

the ability of future generations to meet their own needs.

 Triple bottom line – evaluating the firm against social, economic, and environmental
criteria.

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TRIPLE BOTTOM LINE
 TRIPLE BOTTOM LINE
 Many companies have developed this expanded view through goals that relate to
sustainability along each of the three dimensions: social, economic, and
environmental.
 Some alternative phrases for the same concept are “People, Planet, and Profit”
used by Shell Oil Company; “Folk, Work, and Place” which originated with the
twentieth century writer Patrick Geddes.
 In the following slides, the meaning of each dimension of the triple bottom line
framework has been expanded.

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 TRIPLE BOTTOM LINE
Social : This relates to -
 perform fair and beneficial business practices toward labor, the community,
and the region in which a firm conducts its business
 not use child labor, pay fair salaries, maintain safe work environment, not
exploiting community
 seek to benefit its employees, the community, and other social entities
 give back by contributing to the strength and growth of its community
through health care, education, and other social programs

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 TRIPLE BOTTOM LINE
Economic : This relates-
 to compensate shareholders via a competitive return on investments
 to
promote growth and grow long term value to the shareholders in the form of
profit
 to provide lasting economic benefit to the society

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 TRIPLE BOTTOM LINE
Environmental: This refers to the firms/organizations impact on the
environment.
The company should work -
 to protect the environment as much as possible
 toreduce firm’s ecological footprint by carefully managing its consumption of
natural resources and reducing waste
Many businesses now conduct “cradle-to-grave” assessment of products to
determine what the true environmental costs are – from processing the raw
material to manufacture to distribution to eventual disposal by the final
customer.
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 STRATEGY
 Conventional strategy focuses on the economic part of the triple bottom line
framework.
 Many processes fall under the domain of operations management have a social and
environmental impact. It is very important to consider these criteria.
 European Union countries are more advanced due to the standardized reporting of
ecological and social losses that came with the adoption of EURO.
 Many planners agree with the goals of improving society and preserving the
environment, but many others disagree.
 In doing that, there is a risk of loosing efficiency due to the focus on conflicting
criteria.
 A company in a poor and developing nation must focus on survival and to them the
use of abundant local resources may be viewed as worth their destruction.
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 Operations Strategy
A company that is considered to be world class recognizes that its ability
to compete in the marketplace depends on developing an operations that
is properly aligned with its mission of serving the customer.

A company’s competitiveness refers to its relative position in comparison

to other firms in the local and global marketplace.

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 Operations Strategy
• It is concerned with setting broad policies and plans for using the resources of
the firm to best support the firms long term competitive strategy.
• It is comprehensive through its integration with corporate strategy. It involves a
long term process that must foster inevitable change.
• An operations strategy involves decisions that relate to the design of a process
and the infrastructure needed to support the process.

• For example – the selection of appropriate technology, sizing the process over
time, the role of inventory in the process, and locating the process (Design of a
process), logic associated with planning and control systems, quality assurance
and control approaches, work payment structure, and the organization of the
operations functions. 13
 Operations Effectiveness
 A major focus to the operations strategy is operations effectiveness.

 It relates to the core business processes needed to run the business, i.e., taking customer
orders, handling returns, manufacturing, managing the website, shipping products, etc.

 Operational effectiveness is reflected directly in the costs associated with doing business.

 Strategies associated with operational effectiveness are quality assurance and control
initiatives, process redesign, planning and control systems, technology investments, etc.

 The strategies can show quick near-term (1 to 2 years) results.

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 Operations Strategy
 It coordinates operational goals with those of the larger organization. It must be
designed to anticipate future needs.

 A firm’s operations capabilities can be viewed as a portfolio best suited to

adapting to the changing product and/or service needs of the firm’s customers.

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 Strategy Formulation
 Planning strategy is a process just like making a product or delivering a
service.

 The process involves a set of activities that are repeated at different

intervals over time.

 The strategy planning activities are repeated.

 These activities are performed by the executives.

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 Strategic Planning Process
 The following exhibit shows the major activities of a typical strategic
planning process.
1. Develop/Refine the Strategy
 Define vision, mission, and objectives
 Conduct strategic analysis
 Define strategic competitive priorities

2. Translate the Strategy into Operational Initiatives

 Product design/revision initiatives
 Sourcing/location of facilities initialization

3. Major Focus Points and Projects

 Major operations initiatives
 Major logistics/distribution initiatives
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 Strategic Planning Process…..
 Activity 1 is performed at least yearly and is where the overall strategy is developed.

 Strategic analysis is done here. It involves looking out and forecasting how business
conditions that impacts the firm’s strategy is going to change in the future.

 Things like change in customer preference, the impact of new technologies, change in
population demographics, and anticipation of new competitors are considered.

 Here, the firm needs to define a clear set of priorities to help guide the implementation of a
plan.

 When possible, it is useful to define specific measures that relate to the objectives of the
firm.

 A successful strategy will anticipate change and formulate new initiatives in response.
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 Strategic Planning Process…..
 In Activity 2, the corporate strategy is operationalized through a set of operations initiatives.
 Initiatives are the major steps that need to be taken to drive success in the firm.
 Initiatives like updating of existing product design, modification of the operations of
manufacturing plants, etc. are repeated from year to year.
 New initiatives that innovatively respond to market dynamics are extremely important to
company success. For example, developing new products or open new markets drive future
revenue growth.
 Initiatives that reduce costs directly impact the profitability of the firm.
 In triple bottom line strategies, initiatives are taken to reduce waste or to enhance the
welfare of local communities.

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 Strategic Planning Process…..
 Some initiatives are refined and updated as often as four times a year.

 Here, each initiative is evaluated and appropriate budget estimates for the next
year or more are developed..

 Because of the quickly changing nature of global business, many businesses must
revise plans several times per year .

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 Integration
 It is very important to integrate operations strategy with a firm’s operations
capabilities.

 We need to take decisions to the design of the processes and infrastructure

needed to support these processes.

 Process design includes the selection of appropriate technology, sizing the process
over time, determining the role of inventory in the process, and locating the
process, etc.

 The infrastructure decision involves logic associated with planning and control
systems, quality assurance and control approaches, work payment structure, and
the organization of the operations functions, etc.
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 Competitive Dimensions
 Given the choices customers face today, different customers are attracted
by different attitudes.

 Some customers are interested primarily at the cost of a product or service

and, correspondingly, some companies attempt to position themselves to
offer the lowest price.

 Themajor competitive dimensions that form the competitive position of a

firm are discussed next.

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 Cost or Price
 Within every industry, there is usually a segment of the market that buys strictly on the
basis of low cost. To successfully compete in that market niche, a firm must be the low
cost producer.
 Products and services sold strictly on the basis of cost are typically commoditylike; in
other words, customers cannot distinguish the products of one firm from those of
another.
 This segment of the market is frequently very large, and many companies are lured by
the potential for significant profits which they associate with the large unit volumes.
 But, competition in this segment is fierce and failure rate is high.
 Price, however, is not the only basis on which a firm can compete.
 Some companies like, BMW, Ferrari, Apple, etc. seek to attract people who want higher
quality – in terms of performance, appearance, and features.
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 Quality
 There are two characteristics of a product or service that define quality: design quality and
process quality.
Design Quality:
 Design quality relates to the set of features the product or service contains.
 This relates directly to the design of the product or service.
 The level of quality in a product’s design will vary with the market segment to which it is aimed.
 The goal is establishing the proper level of product quality is to focus on the requirements of
the customer.
 Overdesigned products and services with too many or inappropriate features will be viewed as
prohibitively expensive.
 Underdesigned products and services will lose customers to products that cost a little more but
are perceived by customers as offering greater value.
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Process Quality:
 It is critical because it relates directly to the reliability of the product or service.

 For example, regardless of whether the product is a child’s first two-wheeler or a bicycle
for an international cyclist, customers want products without defects.

 The goal of process quality is to produce defect free products and services.

 Product and service specifications, given in dimensional tolerances and/or service error
rates, define how the product or service is to be made.

 Accordance to these specifications is critical to ensure the reliability of the product or

service as defined by its intended use.

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 Delivery Speed
 In some markets, a company’s ability to deliver more quickly than its competitors
may be very critical.

 For example – a company that can offer on-site repair in only 1 or 2 hrs has a
significant advantage over a competing firm that only guarantees service within 24
hrs.

 Similarly, in online food delivery, delivery speed is a very critical competitive

dimensions.

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 Delivery Reliability

 This dimension relates to the ability of the firm to supply the product or service on or
before a promised delivery due date.

 For an automobile manufacturer, it is very important that its supplier of tires provide
the needed quantity and types for each day’s car production.

 For a service firm, such as Federal Express, delivery reliability is the cornerstone of its
strategy.

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 Coping with Changes in Demand
 In many markets, a company’s ability to respond to increase and decrease in demand is an
important factor in their ability to compete.

 It is well known that a company with increasing demand can do little wrong. When demand
is strong and increasing, costs are continuously reduced due to economics of scale, and
investments in new technologies can be easily justified.

 But scaling back when demand decreases may require many difficult decisions about laying
off employees and related reductions in assets.

 The ability to effectively deal with dynamic market demand over the long term is an
essential element of operations strategy.

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 Flexibility and New Product Introduction Speed
 Flexibility, from a strategic perspective, refers to the ability of a company to offer a wide
variety of products to its customers.

 An important elements to offer different products is the time required for a company to
develop a new product and to convert its processes to offer the new product.

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 Other Product Specific Criteria
 The competitive dimensions just described are certainly most common. However, other
dimensions often relate to specific products or situations.

 Technical liaison and support: A supplier may be expected to provide technical assistance for
product development, particularly during the early stages of design and manufacturing.

 Meeting a launch date: A firm may be required to coordinate with other firms on a complex
project. In such cases, manufacturing may take place while development work is still being
completed. Coordinating work between firms and working simultaneously on a project will
reduce the total time to complete the project.

 Supplier after sale support: An important competitive dimension may be the ability of a firm
to support its product after the sale. This involves availability of replacement parts and,
possibly modification of older, existing products to new performance levels. Speed of
response to these after sale needs is often important to all. 30
 Other Product Specific Criteria

 Environmental impact: This dimension is related to criteria such as carbon dioxide emissions,
use of nonrenewable resources, or other factors that relate to sustainability

 Other dimensions: These typically includes such factors as colors available, size, weight,
location of the fabrication site, customization available, and product mix options.

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 The Notion of Trade-Offs
 One important notion in operations strategy is operations focus and trade-offs. An
operation cannot excel simultaneously in all competitive dimensions.

 So, management has to decide which parameters of performance are critical to the
firm’s success and then concentrate the resources of the firm on these particular
characteristics.

• For example, if a company wants to focus on speed of delivery, it cannot be very

flexible in its ability to offer a wide range of products.

• Similarly, a low-cost strategy is not compatible with either speed of delivery or

flexibility.
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• High quality also is viewed as a trade-off to low cost.
 The Notion of Trade-Offs……………….
 A strategic position is not sustainable unless there are compromises with other positions.

 Trade-offs occur when activities are incompatible so that more of one thing
necessitates less of another.

 An airline can choose to serve meals – adding cost and slowing turnaround time at the
gate – or it can choose not to, but it cannot do both without bearing major
inefficiencies.

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 Straddling
 It occurs when a company seeks to match the benefits of a successful position while
maintaining its existing position.

 It adds new features, services, or technologies onto the activities it already performs.

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 Priorities and Marketplace
 As a one-world economy evolves, company’s have to adopt an international perspective
toward both operations and marketing.

 Competition is significantly more intense due to both the greater number of “players”
and the tremendous opportunities that exist.

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 Changing Competitive Priorities
• Competitive priorities change with time. The customer is looking
for the combination of quality and related criteria.

A recently used term for this combination of customer

requirements is value. Value to the customer means buying a
product with the most important attributes.

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 Order Winners and Order Qualifiers
 Terry Hill of London Business School has coined the terms order winners and
order qualifiers to describe marketing-oriented priorities that are key to
competitive success.

 An order-winner is a criterion that differentiates the products or services of

one firm from another. It can be cost, product quality, or any other priorities.

 An order-qualifier is a screening criterion that permits a firm’s products to

even be considered as possible candidates for purchase.

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 Purchase of a Notebook Computer
 We might think that features like screen size, weight, OS version,, and the cost are important qualifying
dimensions.
 The order winning feature that actually differentiate those candidate notebook computers that qualify is
battery life.
 In the search period, we have developed a list of computers that have 14-inch screen size, weigh less than
three pounds, run the latest Microsoft Windows operating system, and cost less than $1000.
 From the list of acceptable computers, we select the one that has the longest battery life.

 In an industrial setting where a firm is deciding on a supplier, the decision can be quite different.
 Here consider a firm that is deciding on a supplier for its office supplies. Companies such as Office Depot,
OfficeMax, Quill, or Staples might be candidate.
 Here qualifying dimensions are: Can the company supply the item needed, can the supplier deliver orders
within 24 orders, are the items guaranteed, and is a private web-based catalog available?
 The order might be the discount schedule that the company offers on the price of the items purchased.
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 A Framework for Operations Strategy in Manufacturing
• Operations strategy cannot be done in a vacuum. It must be linked
vertically to the customer and horizontally to other parts of the
enterprise.

• There are linkages between customer needs, performance

priorities, requirements for manufacturing operations, enterprise’s
resource capabilities, etc. Overlying this framework is senior
management’s strategic vision of the firm.

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 Strategic Vision
• Strategic vision identifies the target market, the firm’s product
line, and its core enterprise and operations capabilities.

• The choice of target market can be difficult, but it must be made.

Indeed, it may lead to turning away business – ruling out a
customer segment that would simply be unprofitable or too hard
to serve given the firm’s capabilities.

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 Assessing the Risk
 The devastating earthquake and tsunami that hit Jalan in March 2011 were a grim
reminder that managing risk is a critical part of developing an effective operations and
supply chain strategy.
 The uncertainty in the global environment where most supply chains operates require
strategic planners to evaluate the relative riskiness of their strategies.
 Operation risk is defined as the likelihood of a disruption that would impact the ability of
the company to continue its operations.
 These disruptions are unplanned and unanticipated events that disrupt the normal flow
of operations.
 Strategies must consider the risk in their operations and develop initiatives to cope with
these disruptions and mitigate their impact.
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 Risk Categorization
 Disruptions in a supply chain can be viewed in two dimensions:
 Supply chain coordination risks that are associated with the day-to-day management of
the operations in the supply chain which are normally dealt with using safety stock,
safety lead time, overtime, and so on.
 Disruption risks, which are caused by natural or manmade disasters, such as
earthquake, hurricane, and terrorism.

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 Productivity Measurement
 Productivity is a measurement of how well a company is using its resources.
 Productivity measurement is fundamental to understanding operations-related
performance.
 In its broadest sense, productivity is defined as –
Productivity =
To increase productivity, we want to make this ratio of outputs to inputs as large as
possible.
Productivity = , Productivity = ,
Productivity =

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THE END