Chapter Two

OPERATIONS STRATEGY AND COMPETITIVENESS

Time allotted: 4hrs

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 OPERATIONS STRATEGY AND
COMPETITIVENESS
After pursuing this chapter, you should be able to:
OBJECTIVES

• Define operations strategy

• Explain operations strategy and competitiveness

• Identify operations strategy in Manufacturing and Services

LEARNING

• Productivity measurement

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 Strategy
What is strategy?
• Plans for achieving organizational goals
• Organizational strategy provides overall direction
/activities/ for the organization (broad in scope)
• Operation strategy deals with the operation aspect of
the organization(narrower in scope).
• It relates to products, processes, methods, quality, cost,
scheduling etc.

2-3
Mission /Strategy/ Tactics

Mission Strategy Tactics

How does mission, strategies and tactics relate to

decision making and distinctive competencies?

4
• Mission The reason for existence for an organization
• Mission Statement
– States the purpose of an organization
• Goals :-Provide detail and scope of mission
• Strategies: Plans for achieving organizational goals
• Tactics :
– The methods and actions taken to accomplish strategies

2-5
Planning and Decision Making

Mission

Goals

Organizational Strategies

Functional Goals
Finance Marketing Operations
Strategies Strategies Strategies

Tactics Tactics Tactics

Operating Operating Operating

procedures procedures procedures
6
 Examples of Strategies

• Low cost production

• Differentiation

• Specialization

• Flexible operations

• High quality

• Service

2-7
 Key External Factors of strategy
• Economic conditions

• Political conditions

• Legal environment

• Technology

• Competition

• Markets

2-8
 Key Internal Factors

• Human Resources
• Facilities and equipment
• Financial resources
• Products and services
• Technology

2-9
 Strategic OM Decisions
Decision Area Affects
Product and service design Costs, quality liability and environmental

Capacity Cost structure, flexibility

Process selection and layout Costs, flexibility, skill level, capacity

Work design Quality of work life, employee safety, productivity

Location Costs, visibility

Quality Ability to meet or exceed customer expectations

Inventory Costs, shortages

Maintenance Costs, equipment reliability, productivity

Scheduling Flexibility, efficiency

Supply chains Costs, quality, agility, shortages, vendor relations

Projects Costs, new products, services, or operating systems

2-10
 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.
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 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 interaction of three elements:

1. The organization’s external environment,

2. Its resources and
3. Its objectives (in meeting the expectations of its
stakeholders).
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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.)
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 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.

 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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 Conti…

 Delivery speed: “Make the product or deliver the service

quickly” a firm’s ability to deliver more quickly than its
competitors.

 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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 Conti…

 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

 Flexibility Time taken to produce

Mix of different products or services produced

Innovate and introduce new products and services

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 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.
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 Operations excellence and competitive factors

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 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:

1. Defining a primary task

2. Assessing core competencies
3. Determining order winners and order qualifiers
4. Positioning the firm and
5. Deploying the strategy
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 1. Defining a 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.

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 Conti…

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 2. Assessing 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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 Conti…

allow the firm to exploit opportunities or

Valuable neutralize threats in its external
environment

possessed by few, if any, current and

Rare potential competitors

when other firms cannot obtain them or

Costly to imitate must obtain them at a much higher cost

the firm is organized appropriately to

Non substitutable obtain the full benefits of the resources in
order to realize a competitive advantage

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 Conti…

Resources and Capabilities

Valuable

Rare
Core Competencies
Costly to imitate

Non -substitutable

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 Core Competencies are the basis for a firm’s

Competitive
advantage
Value creation
Core Competencies

Ability to earn
above-average
returns

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 3. Determining 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.

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 Conti…

 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.
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 Conti…

• 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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 Conti…

• 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. 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 29the
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 4. 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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 Conti…

Competing on Cost

Positioning
Competing on Speed

Competing on Quality

Competing on Flexibility
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 5. 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 - policy deployment and the

balanced scorecard

 Policy deployment: which translates corporate strategy into

measurable objectives. An example is displayed in the next slide

 Balanced scorecard: a performance assessment that includes

metrics related to customers, processes, and learning and
growing, as well as financials.
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 Example of scorecard

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 Conti…

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 Conti…

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 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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 Conti…

• 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.
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 Conti…

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 Conti…

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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 Conti…

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Questions
???
 End of Chapter 2

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