Chapter Two
OPERATIONS STRATEGY AND COMPETITIVENESS
OBJECTIVES
After pursuing this chapter, you should be able to:
Define operations strategy
Explain operations strategy and competitiveness
LEARNING
Identify operations strategy in Manufacturing and Services
Productivity measurement
Introduction to operations strategy
The long-range plan of a business, designed to provide and
sustain shareholder value, is called the business strategy.
For a company to succeed, the business strategy must be
supported by each of the individual business functions, such
as operations, finance, and marketing.
Operations strategy is a long-range plan for the operations
function that specifies the design and use of resources to
support the business strategy. Just as the players on a
football team support the team‟s strategy, the role of
everyone in the company is to do his or her job in a way
that supports the business strategy.
Operations strategy in Manufacturing and Services
Strategy as „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‟.
Strategy involves the interplay of three elements:
1. the organization‟s external environment,
2. its resources and
3. its objectives (in meeting the expectations of its
stakeholders).
Strategy can exist at three levels in an organization
Corporate level strategy: is the highest level of strategy. It sets
the long-term direction and scope for the whole
organization.
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.
Functional level strategy: The bottom level of strategy is that
of the individual function (operations, marketing, finance,
etc.)
Competitive dimensions
Cost or price: “Make the product or deliver the service
cheap” To successfully compete in dynamic market, a firm
must be the low cost producer, but even this does not
always guarantee profitability and success.
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Quality: “Make a great product or deliver a great
service” Two characteristics of a product or service that
define quality:
1) Design quality This relates directly to the design of the
product or service. The goal is to focus on the
requirements of the customer.
2) Process quality relates to the reliability of the product or
service. The goal is to produce defect-free products.
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Delivery speed: “Make the product or deliver the service
quickly” a firm‟s ability to deliver more quickly than its
competitors.
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Delivery reliability: “Deliver it when promised” the firm‟s
ability to supply the product or service on or before a
promised delivery due date.
Coping with changes in demand: “Change its volume” a
company‟s ability to respond to increases and decreases in
demand.
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Flexibility and new product introduction speed: “Change it”
the ability of a company to offer a wide variety of products
to its customers.
Volume of production
Time taken to produce
Flexibility
Other product specific criteria: “Support it”
Technical liaison and support. Providing technical assistance
to the company.
Meeting a launch date. Reducing the total time required to
complete the project.
Supplier after-sale support. The availability of replacement
parts and modification of older, existing products to new
performance levels.
Other dimensions. These typically include such factors as
colors available, size, weight, location of the fabrication
site, customization available, and product mix options.
Operations excellence and competitive factors
Strategy formulation
Strategy is how the mission of a company is accomplished.
It unites an organization, provides consistency in decisions,
and keeps the organization moving in the right direction.
Strategy formulation consists of five basic steps:
Defining a primary task
Assessing core competencies
Determining order winners and order qualifiers
Positioning the firm and
Deploying the strategy
Primary task
The primary task represents the purpose of a firm - what the
firm is in the business of doing.
It also determines the competitive arena. As such, the
primary task should not be defined too narrowly.
The primary task is usually expressed in a firm‟s mission
statement.
For example: Amazon‟s business is providing the fastest,
easiest, and most enjoyable shopping experience, while
Disney‟s is making people happy!
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Pepsi seeks customers and suppliers all over the
globe.
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Core competency
Core competency is what a firm does better than anyone
else, its distinctive competence.
A firm‟s core competence can be exceptional service, higher
quality, faster delivery, or lower cost.
One company may strive to be first to the market with
innovative designs, whereas another may look for success
arriving later but with better quality.
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allow the firm to exploit opportunities or
Valuable neutralize threats in its external
environment
possessed by few, if any, current and
Rare potential competitors
Costly to imitate
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Resources and Capabilities
Valuable
Rare
Core Competencies
Costly to imitate
Core Competencies are the basis for a firm‟s
Competitive
advantage
Value creation
Core Competencies
Ability to earn
above-average
returns
Organizational Core Competencies
Order winners and order qualifiers
Order qualifiers are the basic criteria that permit the
firms products to be considered as candidates for
purchase by customers.
Order winners are the criteria that differentiates the
products and services of one firm from another.
Consider a simple restaurant that makes and delivers
pizzas.
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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.
The order winners may be “fresh ingredients” and “home-
made taste.” These characteristics may differentiate the
restaurant from all the other pizza restaurants.
However, regardless of how good the pizza, the restaurant
will not succeed if it does not meet the minimum standard
for order qualifiers.
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For example, when purchasing a DVD player, customers
may determine a price range (order qualifier) and then
choose the product with the most features (order winner)
within that price range.
(Or) they may have a set of features in mind (order
qualifiers) and then select the least expensive player (order
winner) that has all the required features.
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Order winners and order qualifiers can evolve over time, just
as competencies can be gained and lost.
For example Japanese and Korean automakers initially
competed on price but had to ensure certain levels of quality
before the U.S. consumer would consider their product.
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Over time, the consumer was willing to pay a higher price
(within reason) for the assurance of a superior-quality
Japanese car. Price became a qualifier, but quality won the
orders.
Today, high quality, as a standard of the automotive
industry, has become an order qualifier, and innovative
design or superior gas mileage wins the orders.
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Positioning the firm
Positioning involves making choices - choosing one or
two important things on which to concentrate and doing
them extremely well.
A firm‟s positioning strategy defines how it will
compete in the marketplace - what unique value it will
deliver to the customer.
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Competing on Cost
Positioning
Competing on Speed
Competing on Quality
Competing on Flexibility
Strategy deployment
Strategy deployment converts a firm‟s positioning strategy
and resultant order winners and order qualifiers into specific
performance requirements.
Two types of planning systems –
Policydeployment and
Balanced scorecard
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Policy deployment: It tries to focus everyone in an
organization on common goals and priorities by translating
corporate strategy into measurable objectives throughout
the various functions and levels of the organization.
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Balanced scorecard: a performance assessment that
includes metrics related to customers, processes, and
learning and growing, as well as financials.
1. Finances - How should we look to our shareholders?
2. Customers - How should we look to our customers?
3. Processes - At which business processes must we excel?
4. Learning and Growing - How will we sustain our ability to
change and improve?
The Balanced Scorecard Worksheet
a set of measures that help
Key performance indicators (KPI):
managers evaluate performance in critical areas.
Dimension Objectives Key Goal KPI Score Mean
Performance for results performance
Indicator 2011 to date
Productivity Become % reduction in 20% 10% 50%
industry cost per unit
cost leader 65%
Growth Increase Market share 50% 40% 80% Finance
market
share
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Dimension Objectives Key Goal KPI Score Mean
Performance for results performance
Indicator 2011 to date
Quality Zero % good 100% 100% 80%
defects quality first
pass
87%
Timeliness On-time % of on- 95% 90% 95%
Customers
delivery time
deliveries
Integrate into % orders delivered to 50% 40% 80%
production assembly
Suppliers 73%
Reduce % suppliers ISO 9000 90% 60% 67%
inspections certified
Reduce time to Cycle time 10 12 83%
Products produce mins mins
52%
Improve quality # warranty claims 200 1000 20%
Reduce
Processes
Distribution transportation % FTL shipments 75% 30% 40% 70%
costs
Improve % queries satisfied
response to on customer first pass 90% 60% 67% 67%
Service customer
inquiries
Reduce Inventory turnover 12 6 50%
inventory 50%
Risk obsolescence
Reduce % order backlogged 10% 20% 50%
customer
backlog
Learning & Growing
Human capital Develop # of six sigma Black Belts 25 2 8%
quality
improveme
nt % trained in SPC 80% 50% 63%
skills 35%
Information Provide % customers who can track 100 60% 60%
capital technology orders %
to improve
processes % suppliers who use EDI 80% 50% 63%
61%
Organizational Create # of employee suggestions 100 60 60%
capital innovative %
culture
% of products new this year 20% 10% 50%
55%
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Single-factor productivity compares output to individual inputs,
such as labor hours, investment in equipment, and material
usage.
Multifactor productivity relates output to a combination of
inputs, such as (labor + capital) or (labor + capital + energy
+ materials). Capital can include the value of equipment,
facilities, inventory, and land.
Total factor productivity compares the total quantity of goods
and services produced with all the inputs used to produce
them.
Productivity measurement
Competitiveness as “the degree to which a nation can
produce goods and services that meet the test of
international markets while simultaneously maintaining or
expanding the real incomes of its citizens.” The most
common measure of competitiveness is productivity.
Productivity is calculated by dividing units of output by
units of input. Output can be expressed in a variety of
scenarios, such as sales made, products produced,
customers served, meals delivered, or calls answered.
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Example 1. BGI Ethiopia is compiling the monthly productivity report for its Board of Directors.
From the following data, calculate (a) labor productivity, (b) machine productivity, and (c) the
multifactor productivity of dollars spent on labor, machine, materials, and energy. The average
labor rate is $15 an hour, and the average machine usage rate is $10 an hour.
Units produced 100,000, Labor hours 10,000, Machine hours
5,000, Cost of materials $35,000
Cost of energy $15,000
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