Topic Two: Operations
Strategy and Competitiveness
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Learning Objectives
• Define the role of Business Strategy
• Explain how a Business strategy is developed
• Explain the role of Operations Strategy in the
organization
• Explain the relationship between business
strategy and operations strategy
• Describe how an operations strategy is
developed
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Learning Objectives
• Identify competitive priorities of the
operations function
• Define productivity and identify
productivity measures
• Compute productivity measures
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Strategic Role of Operations
• Strategy is a course of action together with
decisions on the specification and
deployment of resources required to attain a
stated objective. A strategy is a plan for
competing in the marketplace.
• Depending on the size and type of
organizations, there are three forms of
strategy:
– corporate, business and operational
or functional. 4
Corporate Strategy
• This relates to the organization as a whole. How
should the business fulfill its long-term objectives
and satisfy its mission? A mission here means a
statement of the purpose or the main reason for the
organization’s existence.
• For example, a business school’s mission statement
may be: ‘to be amongst the top ten business schools
in Africa, providing programmes at undergraduate,
postgraduate and executive levels.’ Similarly, a
mission for a construction firm may be: ‘to provide
quality dam and highway bridges both at home and
overseas.’
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Business Strategy
This relates to how an organization intends to
compete in the market place. It sets the
strategic objectives for various functions in the
business, such as marketing, finance,
operations, and so on.
For example, a firm’s competitive strategy may
include:
■ produce at lowest cost (cost leadership)
■ make products different (differentiation)
■ focus on one group of customers (focus).
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Cont’d…
The business strategy usually covers
plans for three to five years ahead and
is reviewed annually.
It should specify what needs to be done
over the next year or so in order to
achieve the long-term goals of the
organization.
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To Develop a Business Strategy
• Consider these factors and strategic
decisions:
– Which business is the company in (mission)
– Analyze and understand the market
(environmental scanning)
– Identify the company strengths (core
competencies)
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Fig 2.1.: Three Inputs to a Business Strategy
Core
Environment Scanning Mission Competences
Monitoring the business Statement that defines
Unique
Environment for market what is our business:
Who are our clients;
strengths that
trends, threats and
and how our values can help us win
Opportunities
define our business in the market
Business Strategy
Define the long-range plan
for the Company
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Operations Strategy
• Operations strategy is the pattern of decisions
and the course of action taken either by the
individual functions within a business (micro
operations),or the whole organization (macro
operation), in order to create goods and services
which will satisfy the organization’s business
strategy.
• This means that operation’s resources must be
selected, deployed and managed in the most
effective manner using the right technology,
workforce, systems and procedures to meet the
strategic goals of the organization.
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• In brief, Operations strategy is concerned with
setting broad policies and plans for using the
resources of a firm to best support the firm’s
long-term competitive strategy.
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The Role of Operations Strategy
• Provide a plan that makes best use of
resources which;
– Specifies the policies and plans for using
organizational resources
– Supports Business Strategy as shown on next
slide
• Operations strategy ensures all tasks
performed are the right tasks
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Fig 2.2.: Business/Functional
Strategy
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Vision statement
It is an aspirational description of what
an organization would like to achieve
or accomplish in the mid-term or long-
term future.
It is intended to serve as a clear guide
for choosing current and future courses
of action.
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Mission statement
• The mission statement is a written declaration
of an organization's core purpose and focus
that normally remains unchanged over time.
• Properly crafted mission statements (1) serve
as filters to separate what is important from
what is not, (2) clearly state which markets
will be served and how, and (3) communicate
a sense of intended direction to the entire
organization. 15
Mission versus Vision
• A mission is different from a vision in that
the former is the cause and the latter is the
effect;
• A mission is something to be accomplished
whereas a vision is something to be pursued
for that accomplishment. A mission
statement focuses and really describes how a
company plans on achieving its objectives.
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Key Examples
• Mission: Microsoft's mission statement is
“to empower every person and every
organization on the planet to achieve more.”
• ‘Empowerment’ is the key term in this
mission statement. It represents the primary
objective of the company and what the
strategic tactics of the organization seek to
achieve.
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Key Examples
• Vision: Microsoft’s corporate vision is “to
help people and businesses throughout
the world realize their full potential.”
• This vision statement shows that the
company presents its business and
computing products as tools that people
and business organizations can use for
their development.
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• 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 know-how, logistics.
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Developing an Operations Strategy
Operations Strategy is a plan for the design
and management of operations functions.
Operations strategy:
–is developed after the business strategy
–focuses on specific capabilities which
give it a competitive edge – competitive
priorities
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Figure 2.3.: Operations Strategy Model
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Elements of Operations Strategy
• Operations Mission: should have a mission that is
connected to the business strategy and in agreement with
the other functional strategies. E.g: if the business strategy
is product leadership, the operations mission should
emphasize new product introduction, etc...
• Operations distinctive competence (or operations
capability) that differentiates it from the competitors i.e.
something that operations does better than anyone else. It
should be based on unique resources (human or capital) that
are difficult to imitate. This can be based on proprietary or
patented technology or any innovation in operations that
cannot be copied. 22
• Operations objectives: Four common operations
objectives are: cost, quality, delivery, flexibility.
These objectives are derived from the mission.
They restate the mission in quantitative and
measurable terms.
• Objectives should be strategic in nature i.e. they
should quantify long-range operations
performance (5 to 10 years). They are compared
to the current year and also current world class
competitor(s) for benchmarking purposes.
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• Operations policies: should indicate how
operations objectives will be achieved.
Operations policies should be developed for each
of the major decision categories namely:
– Process (span of process: make or buy, automation:
handmade or machine-made, process flow: project,
batch, line or continuous; job specialization: high or
low, supervision: highly (de)centralized , etc..)
– Quality systems (approach: prevention or inspection,
training: technical or managerial, supplies: selected
on quality or cost, etc..)
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–Capacity (facility size: one large or
several small facilities, location: near
market, low cost or foreign, etc..)
–Inventory (amount: high or low,
distribution: centralized or decentralized
ware house, control systems: great or
less detail, etc..)
Policies should be well integrated with other
other functional decisions and policies.
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Balanced Scorecard
• Robert Kaplan and David Norton have developed their
concept of “Balanced Scorecard” to tell the story of how
well an integrated strategy is being executed.
• The Balanced Scorecard describes a popular approach
for organizing a firm’s Key Performance Indicators
(KPIs). KPIs are a set of measures that help managers
evaluate a company’s economic performance and help
spot the need for changes in operations.
• They proposed that an integrated set of measures be
developed to track performance from financial, customer,
internal, and learning and growth perspectives. 26
Cont’d…
• The Balanced Scorecard is a tool that forces you to
articulate/clear/communicate the strategy. It helps to
highlight the cause-effect relationships among
performance drivers and identify the links to the
strategic outcomes.
• The Balanced scorecard include metrics that help the
company answer three critical performance
questions:
1. How do our customers see us?
2. What must we excel at?
3. How can we continue to improve and create
value?
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Balanced Scorecard
1. Financial perspective: is concerned with
improving shareholder value by looking for
new revenue resources, increase customer
value, improve customer value, and improve
asset utilization)
2. Customer perspective: is the heart of the
strategy and defines how growth will be
achieved. The value proposition defines the
specific strategy to compete for new
customers or increased share of existing
customer businesses. It focuses on product
leadership, customer intimacy, operational
excellence)
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Cont’d…
3. Internal perspective: defines the business
processes and activities that the organization
must master to support the customer value
proposition.
4. Learning and growth perspective
defines intangible assets needed to enable
activities and customer relationship to be
performed at high levels of performance now
and in the future.
These intangible assets include strategic
competences, strategic technologies, climate
for action.
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OPERATIONS POLICIES PRACTICES
PROCESSES AND PERFORMANCE (Here)
• Operations managers manage processes via the four ‘P’s
of operations: Policies, Practices, Processes and
Performance. Figure 2.4. defines each ‘P’ and shows the
relationship between all of them. The four key elements
and their relationship are described below.
• Policies are the stated aims, objectives and strategies for
the organization including operations. Policies are based
on the desired state of affairs that an organization wants
to achieve. The organization’s mission statement has an
important part in articulating the organization’s policy.
Strategy is concerned with how the organization will get
there. Policies define the Practices- the systems,
procedures and technological capabilities – that need to
be in place within the organization.
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Fig 2.4.: OPERATION POLICIES, PRACTICES,
PROCESSES AND PERFORMANCE
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Competitive Priorities/important-
The Edge
• Four Key Operations Questions:
Will you compete on –
Cost?
Quality?
Time?
Flexibility?
• All of the above? Some? Tradeoffs?
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Competing on Cost
• Offering product at a low price relative to
competition:
– Typically high volume products
– Often limit product range & offer little
customization
– May invest in automation to reduce unit costs
– Can use lower skill labor
– Probably uses product focused
layouts/plans/designs
– Low cost does not mean low quality 34
Competing on Quality
• Quality is often subjective/personal
• Quality is defined differently depending on who is
defining it
• Two major quality dimensions include
– High performance design:
• Superior features, high durability, & excellent
customer service
– Product & service consistency:
• Meets design specifications
• Close tolerances (allowable variations of quantity)
• Error free delivery
• Quality needs to address
– Product design quality – product/service meets
requirements
– Process quality – error free products
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Competing on Time
• Time: Speed is one of most important competition
priorities
• When you deliver the first you often win the race
• Time related issues involve
– Rapid delivery:
• Focused on shorter time between order, placement
and delivery
– On-time delivery:
• Deliver product exactly when needed every time
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Competing on Flexibility
• Since the Company environment is subject to
frequent and rapid changes, the Company must
accommodate changes by being flexible.
– Product flexibility:
• Easily switch production from one item to
another
• Easily customize product/service to meet specific
requirements of customers
– Volume flexibility:
• Ability to grade production up and/or down to
match market demands
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Dealing with Trade-offs
For example, if we reduce costs by reducing product
quality inspections, we might reduce product quality.
Example II, if we improve
customer service
problem solving by cross- Cost
training personnel to
deal with a wider-range Flexibility Delivery
of problems, they may
become less efficient at Quality
dealing with commonly
occurring problems. 38
The Need for Trade-offs
• Decisions must emphasize priorities
that support business strategy
• Decisions must be made on often
required trade-offs
• Decisions must focus on order
qualifiers and order winners
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Order Qualifiers and Winners
Order Qualifiers: Screening criterion that permits a firm’s products or
services to be considered as possible candidates for purchase. An order
qualifier is a characteristic of a product or service that is required in order for
the product/service to be appreciated by a customer. Order Winners:
Criterion that differentiates the products or services of one firm from
another. An order winner is a characteristic that will win the bid or
customer's purchase.
The terms "order winners" and "order qualifiers" refer to the process of how
internal operational capabilities are converted to criteria that may lead to
competitive advantage and market success.
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Productivity Measurement
• Productivity is defined in terms of utilization of
resources like material, labor, etc. It is a common
measure of how well a country, industry, or
business unit is using its resources (or factors of
production).
• Productivity is commonly defined as a ratio of a
volume measure of output to a volume measure of
input use.
• Productivity measurement helps to understand
operations versus related performance.
• Productivity is closely linked with quality,
technology and profitability. Thus, it should
be improved in competitive business
environment.
• Productivity can be improved by:
① Controlling inputs,
② Improving process so that the same input
yield higher output
③ Improvement of technology
• Productivity is a relative measure. For it to
be meaningful, it needs to be compared to
something else.
• Productivity Comparisons can be in two
ways:
a) Compare itself with similar operations within
the industry
b) Measure productivity over time within the
same operations (compare productivity for
different periods i.e. years)
PRODUCTIVITY AND QUALITY
• Efficiency and productivity refer to a ratio of
outputs to inputs.
• Performance is a broader term incorporating
efficiency and productivity in overall
achievement
• Productivity= outputs/labor + capita+
materials+ energy
• Labor productivity: output/labor input
• Quality refers to the degree to which the
design specifications for a product or
service are appropriate to its function and
use, the degree to which a product or a
service confirms to its design
specifications.
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Relationship between quality and
productivity
• Generally, when quality increases, so will
productivity.
• Why? Because waste and rework are
eliminated, thus the amount of inputs
required for production is reduced.
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TOTAL VS. PARTIAL FACTOR
PRODUCTIVITY
• Total factor Productivity: is the ratio of
outputs to the total inputs of labor, capital,
materials and energy.
Total Productivity= Total outputs
Total inputs
• Partial factor productivity: is the ration of
outputs to one, two or three of these inputs
Productivity measurements
Examples
1. A company that processes fruits and vegetables is
able to produce 400 cases of conserved peaches in
one half hour with four workers. What is the labor
productivity?
Solution:
Labor productivity = Quality Produced / Labors
Hours
=400 cases/(4 workers x 1/2 hours per worker)
=400 cases/2 labor hours
=200 cases per labor hour
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Examples
2. A wrapping paper company produced 2,000 rolls
of paper one day. Standard price is $ 1/roll. Labor
cost was $ 160, material cost was $ 50, and
overhead was $ 320. Determine the multifactor
productivity.
Solution:
Multifactor productivity = Quality produced at
standard price/(Labor cost + Material cost +
Overhead)
= 2,000 rolls x $ 1/ ($160+ $ 50 + $320)
= 3.77 rolls output per dollars
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Examples
3. a) Find the productivity if four workers installed 720
square yards of carpeting in eight hours.
b) Compute for the productivity of a machine which
produced 68 usable pieces in two hours.
Solution:
a) Productivity = yards of carpeting install / Labors
Hours worked
= 720 square yard / (4 workers x8 hours / worker)
= 720 yards / 32 Hours
= 22.5 yards/ hours
b) Productivity = Usable Pieces / Production Time
= 68 usable pieces / 2 hrs
= 34 pieces/ hour
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Examples
4. Determine the multifactor productivity for the
combined input of the labor and the machine time
using the following:
Input are Labor: $ 1,000; Materials: $ 520 and
Overheads: $ 2,000
Keep in mind the Production is 1760 unit
Solution:
Multifactor Productivity= Output / (Labor +
Materials + Overheads)
=1,760 Units / ($1,000 + $520 + $2,000)
=0.50 units per dollar.
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Examples
5. Collins Little Company has a stuff of 4, each working 8 hours per day (for a
payroll cost of $ 640 / day) and overhead expenses of $ 400 / day. Collins processes
and closes on 8 titles each day. The company recently purchased a computerized
title search system that will allow the processing of 14 titles per day. Although the
staff, their works hours, and pay will be same, the overheads expenses are now $
800 per day. Determine:
a. The labor productivity with the old system
b. The labor productivity with the new system
c. The multifactor productivity with the old system
d. The multifactor productivity with the new system
Solution:
• Labor productivity with the old system: = 8 titles per day/ 32 labor hours
• = 0.25 titles per hour
• Labor productivity with the new system: =14 titles per day/ 32 labor hours =
0.44 title per labor hours
• Multifactor productivity with the old system: =8 titles per day / (640 + 400)
• = 0.0077 titles per dollars
• Multifactor productivity with the new system: =14 titles per day / (640 + 800)=
0.0097 titles per dollars
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