Chapter two

OPERATIONS STRATEGY &

COMPETITIVENESS
 2.1. Introduction to Operations
strategy
• Business strategy; A long-range plan for a business.
• Operations strategy; A long-range plan for the
operations function that specifies the design and
use of resources to support the business strategy.
• The role of operations strategy is to provide a plan
for the operations function so that it can make the
best use of its resources.
• Operations strategy specifies the policies and plans
for using the organization’s resources to support its
long-term competitive strategy.
 Cont’d
• This includes the location, size, and type
of facilities available; worker skills and
talents required; use of technology,
special processes needed, special
equipment; and quality control methods.
• The operations strategy must be aligned
with the company’s business strategy and
enable the company to achieve its long-
term plan.
2.2. Developing operations strategy
• A company’s business strategy is developed after its
managers have considered many factors and have
made some strategic decisions.
• These include developing an understanding of what
business the company is in (the company’s mission),
analyzing and developing an understanding of the
market (environmental scanning), and identifying the
company’s strengths (core competencies).
• These three factors are critical to the development of
the company’s long-range plan, or business
strategy.
 Cont’d
Mission
• A statement defining what business an organization is in,
who its customers are, and how its core beliefs shape its
business. It is an enduring statement of purpose that
distinguishes one organization from other similar
enterprises,
• The mission defines the company. In order to develop a long-
term plan for a business, you must first know exactly what
business you are in, what customers you are serving, and
what your company’s values are.
• A mission statement reveals what an organization wants to be and
whom it wants to serve.
• If a company does not have a well defined mission, it may pursue business
opportunities about which it has no real knowledge or that are in conflict
with its current pursuits/searches/, or it may miss opportunities
 Cont’d
Environmental scanning
• It is the process of monitoring the external
environment.
• To remain competitive, companies have to
continuously monitor their environment and be
prepared to change their business strategy, or
long-range plan, in light of environmental
changes.
• Environmental scanning allows a company to
identify opportunities and threats.
 Cont’d
• For example, through environmental scanning we
could see gaps in what customers need and what
competitors are doing to meet those needs.
• A study of these gaps could reveal an opportunity for
our company, and we could design a plan to take
advantage of it.
• On the other hand, our company may currently be a
leader in its industry, but environmental scanning
could reveal competitors that are meeting customer
needs better—for example, by offering a wider
array/varieties/ of services.
 Cont’d
Core Competencies
• The third factor that helps define a business strategy is
an understanding of the company’s strengths. These
are called core competencies.
• In order to formulate along-term plan, the company’s
managers must know the competencies of their
organization.
• Core competencies could include special skills of workers,
such as expertise in providing customized services or
knowledge of information technology.
• Another example might be flexible facilities that can handle
the production of a wide array of products. To be successful, a
company must compete in markets where its core
competencies will have value.
 Cont’d
• Once a business strategy has been developed,
an operations strategy must be formulated.
• This will provide a plan for the design and
management of the operations function in ways
that support the business strategy.
• The operations strategy relates the business
strategy to the operations function.
• The operations strategy focuses on specific
capabilities/competitive priorities/ of the
operation that give the company a competitive
edge.
 Cont’d
• These capabilities are called competitive
priorities.
• By excelling in one of these capabilities, a
company can become a winner in its market.
• Competitive priorities are capabilities that the
operations function can develop in order to give
a company a competitive advantage in its
market.
 Cont’d
• Operations managers must work closely with
marketing in order to understand the
competitive situation in the company’s
market before they can determine which
competitive priorities are important. There
are four broad categories of competitive
priorities:
These are cost, quality, time and flexibility
 Cont’d
1. Cost; competing based on cost means offering a
product at a low price relative to the prices of
competing products.
• The need for this type of competition
emerges/arises / from the business strategy.
• The role of the operations strategy is to develop
a plan for the use of resources to support this
type of competition.
• Note that a low-cost strategy can result in a
higher profit margin, even at a competitive price.
 Cont’d
• Also, low cost does not imply low quality.
• To develop this competitive priority, the operations
function must focus primarily on cutting costs in
the system, such as costs of labor, materials, and
facilities.
• Companies that compete based on cost study their
operations system carefully to eliminate all waste.
• They might offer extra training to employees to
maximize their productivity and minimize scrap.
 Cont’d
2. Quality ; A competitive priority focusing on the quality of
goods and services.
• Many companies claim/entitlement/ that quality is their top
priority, and many customers say that they look for
quality in the products they buy.
• Yet quality has a subjective meaning; it depends on who is
defining it. For example, to one person quality could mean
that the product lasts a long time, such as with a Volvo, a car
known for its longevity. To another person quality might mean
high performance, such as a BMW.
• When companies focus on quality as a competitive priority,
they are focusing on the dimensions of quality that are
considered important by their customers.
 Cont’d
• Quality as a competitive priority has two
dimensions/ high-performance design & consistency/
• The first is high-performance design.
• This means that the operations function will be
designed to focus on aspects of quality such as
superior features, close tolerances, high
durability, and excellent/outstanding/ customer
service.
 Cont’d
• The second dimension is goods and services
consistency, which measures how often the goods
or services meet the exact design specifications.
• Companies that compete on quality must deliver
not only high-performance design but goods and
services consistency as well.
• A company that competes on this dimension needs
to implement quality in every area of the
organization.
 Cont’d
• One of the first aspects that needs to be addressed
is product design quality, which involves
making sure the product meets the
requirements of the customer.
• A second aspect is process quality, which deals
with designing a process to produce error-free
products.
• This includes focusing on equipment, workers,
materials, and every other aspect of the operation
to make sure it works the way it is supposed to.
 Cont’d
3. Time; is one of the most important competitive
priorities today.
• Companies in all industries are competing to deliver
high-quality products in as short a time as
possible.
• Making time a competitive priority means
competing based on all time-related issues, such
as rapid delivery and on-time delivery.
• Rapid delivery refers to how quickly an order is
received; on-time delivery refers to how often
 Cont’d
• Another time-competitive priority is development speed,
which is the time needed to take an idea to the
marketplace. This is especially critical in technology and
computer software fields.
• When time is a competitive priority, the job of the
operations function is to critically analyze the system
and combine or eliminate processes in order to save
time.
• Often companies use technology to speed up processes,
rely on a flexible workforce to meet peak demand periods,
and eliminate unnecessary steps in the production process
 Cont’d
4. Flexibility; As a company’s environment changes rapidly,
including customer needs and expectations, the ability to
readily accommodate these changes can be a winning
strategy. This is flexibility.
It is Changes of company’s environment including customer
needs and expectations.
• There are two dimensions of flexibility. One is the ability to
offer a wide variety of goods or services and customize them
to the unique needs of clients. This is called product
flexibility.
• A flexible system can quickly add new products that may be
important to customers or easily drop a product that is not
doing well.
 Cont’d
• Another aspect of flexibility is the ability to rapidly
increase or decrease the amount produced in order
to accommodate changes in the demand. This is called
volume flexibility.
• You can see the meaning of flexibility when you compare
ordering a suit/costume/ from a custom tailor to buying
it off the rack/shelf/ at a retailer. Another example
would be going to a fine restaurant and asking to have a
meal made just for you, versus going to a fast food
restaurant and being limited to items on the menu.
• The custom tailor and the fine restaurant are examples
of companies that are flexible and will accommodate
customer wishes.
 Cont’d
• Companies that compete based on flexibility often cannot
compete based on speed because it generally requires more
time to produce a customized product.
• Also, flexible companies typically do not compete based on
cost because it may take more resources to customize the
product.
• However, flexible companies often offer greater
customer service and can meet unique customer
requirements.
• To carry out this strategy, flexible companies tend to have
more general-purpose equipment that can be used to make
many different kinds of products.
 Cont’d
• The operation function must place emphasis on those
priorities that directly support the business strategy.
• Therefore, it needs to make trade-offs between the
different priorities.
• Trade-off means the need to focus more on one
competitive priority than on others.
• For example, consider a company that competes on using
the highest quality component parts in its products.
Due to the high quality of parts, the company may not be
able to offer the final product at the lowest price. In this
case, the company has made a trade-off between quality
and price.
 Cont’d
• It is important to know that every business
must achieve a basic level of each of the
priorities, even though its primary focus is
only on some.
• For example, even though a company is not
competing on low price, it still cannot offer
its products at such a high price that
customers would not want to pay for them.
 Cont’d
• To help a company decide which competitive
priorities to focus on, it is important to
distinguish between order winners and order
qualifiers, which are concepts developed by
Terry Hill, a professor at Oxford University.
• Order qualifiers are competitive priorities that
must be met for a company to qualify as a
competitor in the marketplace. Meet the requirement
• Order winners are competitive priorities that
win orders in the marketplace. Be eligible
 Cont’d
• 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. 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.
• Knowing the order winners and order qualifiers in a
particular market is critical to focusing on the right
competitive priorities.
 Cont’d
• It is important to understand that order winners
and order qualifiers change over time.
• Often when one company in a market is
successfully competing using a particular order
winner, other companies follow suit over time.
• The result is that the order winner becomes an
industry standard, or an order qualifier.
• To compete successfully, companies then have to
change their order winners to differentiate
themselves.
 Cont’d
• Operations strategy makes the needs of the
business strategy specific to the operations function
by focusing on the right competitive priorities.
• Once the competitive priorities have been identified,
a plan is developed to support those priorities.
• The operations strategy will specify the design and
use of the organization’s resources; that is, it will set
forth specific operations requirements.
• These can be broken down into two categories which
are structure and infrastructure.
 Cont’d
Structure;
• Operations decisions related to the design of the production
process, such as characteristics of facilities used, selection of
appropriate technology, and flow of goods and services through
the facility.
Infrastructure;
• Operations decisions related to the planning and control
systems of the operation, such as organization of the
operations function, skills and pay of workers, and quality
control approaches.
• Together, the structure and infrastructure of the production
process determine the nature of the company’s operations
function.
• The structure and infrastructure of the production process must
 Cont’d
• Suppose we determined that time or speed of delivery is the
order winner in the marketplace and the competitive priority
we need to focus on. We would then design the production
process to promote speedy product delivery.
• The important thing is that every aspect of production of a
product or delivery of a service needs to focus on supporting
the competitive priority.
• However, we cannot neglect the other competitive priorities. A
certain level of order qualifiers must be achieved just to
remain in the market. The issue is not one of focusing on one
priority to the exclusion of the others. Rather, it is a matter of
degree.
 2.3. Productivity
• Sound business strategy and supporting
operations strategy make an organization more
competitive in the marketplace. But how does
a company measure its competitiveness?
• One of the most common ways is by
measuring productivity.
• In this section we will look at how to measure
the productivity of each of a company’s
resources as well as the entire organization.
 Cont’d
• A measure of how efficiently inputs are being
converted into outputs is called productivity.
• It is computed as a ratio of outputs (goods and
services) to inputs (e.g., labor and materials).
• The more efficiently a company uses its
resources, the more productive it is.
•
Outputs
Productivity =
Inputs
 Cont’d
• Productivity may be expressed as partial measures,
multifactor measures, or total measures.
• If we are concerned with the ratio of output to a single
input; we have a partial productivity measure.
• If we want to look at the ratio of out put to a group of
inputs (but not all inputs), we have a multifactor
productivity measure.
• If we want to express the ratio of all outputs to all
inputs, we have a total factory measure of
productivity that might be used to describe the
productivity that might be used to describe the
productivity of an entire organization or even a nation.
Cont’d
 Cont’d
• To interpret the meaning of a productivity measure, it must
be compared with a similar productivity measure.
• For example, if one worker at a pizza shop produces 17 pizzas
in two hours, the productivity of that worker is 8.5 pizzas per
hour. This number by itself does not tell us very much.
• However, if we compare it to the productivity of two other
workers, one who produces 7.2 pizzas per hour and another
6.8 pizzas per hour, it is much more meaningful.
• We can see that the first worker is much more productive
than the other two workers. But how do we know whether
the productivity of all three workers is reasonable? What we
need is a standard.
 Cont’d
• When evaluating productivity and setting standards for
performance, we also need to consider our strategy for
competing in the marketplace—namely, our competitive
priorities.
• A company that competes based on speed would probably
measure productivity in units produced over time.
• However, a company that competes based on cost might
measure productivity in terms of costs of inputs such as labor,
materials, and overhead.
• The important thing is that our productivity measure provides
information on how we are doing relative to the
competitive priority that is most important to us.
 Cont’d
To summarize
• Operations strategy decisions are critical because they serve as
a linkage between the business strategy and all the other
operations decisions.
• Recall that operations strategy provides a plan for the OM
function that supports the business strategy.
• In turn, decisions regarding operations strategy directly impact
decisions on organizational structure and infrastructure of the
company.
• Subsequently we will discuss some of specific decisions that
pertain to organizational structure and infrastructure. We will
see that these decisions are governed by the firm’s operations
strategy.