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Chapter 2 - Operations Strategy
and Competitiveness

Operations Management

6th Edition

R. Dan Reid & Nada R. Sanders

Learning Objectives

Explain the role of operations strategy in the organization.
Explain how a business strategy is developed.
Describe how an operations strategy is developed.
Explain the strategic role of technology.
Define productivity and identify productivity measures.

The Role of Operations Strategy

Provides a plan that makes best use of resources and:
Specifies the policies and plans for using organizational resources
Supports Business Strategy - an organizations long range plan (see graph on next slide)

Business/Functional Strategy

Importance of Operations Strategy

Essential differences between operational efficiency and strategy:
Operational efficiency is performing tasks well, or better than competitors
Strategy is a plan for competing in the marketplace
Operations strategy ensures all tasks performed are the right tasks

Developing a Business Strategy

Consider these three critical factors in developing a business strategy:
What is the business goal? (mission)
Does company understand the market? (environmental scanning)
What are the company strengths? (core competencies)

A more detailed explanation of what goes into a business strategy can be found on page 31 of your textbook.

Core Competencies

Creating the Business Strategy

Examples of Key Factors

Mission: Dell Computer – “to be the most successful computer company in the world”
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 abilities, logistics

Developing an Operations Strategy

Operations Strategy:

Is a plan for the design and management of operations functions
Is developed after the business strategy
Focuses on specific capabilities which give it a competitive edge – competitive priorities

Designing the Operations Function

Competitive Priorities – The Edge

Four Key Operations Questions - Can a company compete on:

Cost?

Quality?

Time?

Flexibility?

All of the above? Some? Tradeoffs?

1. Competing on Cost

Offer product at lower price than competition

Typically high volume products
Often limit product range with little customization
May invest in automation to increase productivity
Might offer extra training to employees
Focus on cutting costs and eliminating waste
Low cost does not mean low quality

Have students discuss Southwest Airlines’ strategic decision to compete on cost.

2. Competing on Quality

Quality is often subjective & 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
Error free delivery
Quality must address
Product design quality – product/service meets requirements
Process quality – error free products

3. Competing on Time

Time/speed a top competitive priority
First to deliver often wins the race
Time-related issues involve:
Rapid and/or on-time delivery
Focused on shorter time between order placement and delivering product exactly when needed every time

The story of FedEx’s creation is an excellent story for this Priority.

4. Competing on Flexibility

Business environments can change rapidly; company’s must accommodate change by being flexible
Product flexibility:
Offer a wide variety of goods/services, easily customized to meet specific requirements of customer
Easily drop or add product to meet customer demand
Volume flexibility:
Ability to rapidly increase or decrease production to match market demands

The Need for Trade-offs

Decisions
must emphasize priorities that support business strategy
often required trade-offs
must focus on order qualifiers and order winners

Order Qualifiers & Winners

Which priorities are “Order Qualifiers”?

Hint: Must meet market’s competitive priorities since market expects it

Which priorities are “Order Winners”?

Hint: Dell competes on all four priorities

Southwest Airlines competes on cost

McDonald’s competes on consistency

FedEx competes on speed

Pizzerias compete on homemade taste

Translating Competitive Priorities into Production Requirements

Structure decisions related to the production process:
characteristics of facilities used
selection of appropriate technology
flow of goods and services

Infrastructure decisions related to planning & control systems of operations:
organization of operation function
skill/pay of workers
quality control approaches

Example: Dell Computer

Structure & Infrastructure

Focus on customer service, cost, and speed
ERP system allows customers to order directly from Dell
Product design and assembly line allow a “make to order” strategy – lowers costs, increases turns
Suppliers ship components to a warehouse within 15 minutes of the assembly plant - VMI
Dell set up a shipping arrangement with UPS

Strategic Role of Technology

Technology must support competitive priorities

Three Types of Technology Applications:

Product Technology – (New technology)

Examples: Teflon, CD’s, fiber optic cable

Process Technology – (Improves process)

Examples: flexible automation, CAD, CAM

Information Technology – (Enables communication)

Examples: POS, EDI, ERP, B2B

Positive Potential

Negative Potential

Benefits
Improve processes
Maintain up-to-date standards
Gain competitive advantage

Risks
Costly
Can overstate benefits
Obsolescence

Technology as a Tool for Competitive Advantage

Technology at Its Best:

Supports competitive priorities
Can require change to strategic plans
Can require change to operations strategy

Technology is a crucial strategic decision

Measuring Productivity

Productivity is a measure of how efficiently inputs are converted to outputs Productivity = Output/input

Total Productivity Measure

Total Productivity = Output produced/All inputs used

Partial Productivity Measure

Partial Productivity = Output/labor or Output/Capital

Multifactor Productivity Measure

Multi-factor Productivity = Output/labor + Materials

Measuring Productivity

Productivity Examples

Can students think of other factors that will affect productivity – unions for example, or the economy…

Productivity Examples

Can students think of other factors that will affect productivity – unions for example, or the economy…

Interpreting Productivity Measures

Productivity measures must be compared to something, i.e., another year, a different company
Raw productivity calculations do not tell the complete story unless there are no major structure differences.
In the prior automobile business example, it is obvious that some major changes were taking place to yield 15.8% and 13.7% year-to-year cars/employee productivity improvements. What changes could improve car sales per employee? Automation? Outsourcing? Major re-design?

Interpreting Productivity Measures

Other productivity measure questions:
Is this partial productivity measurement enough to make an investment decision?
Is the Total Cost Productivity measure a better reflection of year to year productivity at 4.2% and 1.6%. Why?
Should you also look at productivity measures for the two major competitors for comparison?

Productivity measure provides information on how the firm is doing relative to what is critical to the firm

Productivity and Competitiveness

Productivity is a scorecard on effective resource use
A nation’s Productivity directly related to standard of living
US productivity growth averaged 2.8% from

1948-1973

Productivity growth slowed for the next 25 years to 1.1%
Productivity growth in service industries has been less than in manufacturing

Changes in U.S. Productivity

Productivity and the Service Sector

Measuring service sector productivity is a unique challenge
Traditional measures focus on tangible outcomes
Service industries primarily produce intangible outcomes
Measuring intangibles is challenging

Operations Strategy within OM

Strategic decisions of firm drive tactical decisions
Business strategy defines long-term plan
Operations strategy support the business strategy
Marketing strategy needs to fully understand operations capability
Financial plans in effect support operations activities.

Chapter 2 Highlights

Business Strategy is a long range plan and vision. Each individual business function needs to support the business strategy.
An organization develops its business strategy by doing environmental scanning and considering its mission and its core competencies.
The role of operations strategy is to provide a long-range plan for the use of the company’s resources in producing the company’s primary goods and services.
The role of business strategy is to serve as an overall guide for the development of the organization’s operations strategy.

Chapter 2 Highlights

The operations strategy focuses on developing specific capabilities called competitive priorities.
There are four categories of competitive priorities: cost, quality, time, and flexibility.
Technology can be used by companies to gain a competitive advantage and should be acquired to support the company’s chosen competitive priorities.
Productivity is a measure that indicates how efficiently an organization is using its resources.
Productivity is computed as the ratio or organizational outputs divided by inputs.