1

Operations Strategy and Competitiveness

OBJECTIVES
Operations Strategy Competitive Dimensions Order Qualifiers and Winners Strategy Design Process

A Framework for Manufacturing

Strategy

Service Strategy (Capacity/Capabilities)

Productivity Measures

Operations Strategy
Strategy Process
Customer Needs

Example
More Product

Corporate Strategy

Increase Org. Size

Operations Strategy

Increase Production Capacity

Decisions on Processes and Infrastructure

Build New Factory

Competitive Dimensions
Cost
Product Quality and Reliability Delivery Speed

Delivery Reliability
Coping with Changes in Demand Flexibility and New Product Introduction

Speed Other Product-Specific Criteria

Dealing with Trade-offs

For example, if we reduce costs by reducing product quality inspections, we might reduce product quality. For example, if we improve customer Cost service problem solving by crossFlexibility training personnel to deal with a wider-range Quality of problems, they may become less efficient at dealing with commonly occurring problems.

Time

Order Qualifiers and Winners Defined

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

Service Breakthroughs
A brand name

car can be an order qualifier

Repair services can be order winners

Examples: Warranty, Roadside Assistance, Leases, etc

Strategy Design Process

Strategy Map
Financial Perspective

What it is about!
Improve Shareholder Value

Customer Perspective

Customer Value Proposition

Internal Perspective

Build-Increase-Achieve

Learning and Growth Perspective

A Motivated and Prepared Workforce

Steps in Developing a Manufacturing Strategy

1. Segment the market according to the product group 2. Identify product requirements, demand patterns, and profit margins of each group 3. Determine order qualifiers and winners for each group 4. Convert order winners into specific performance requirements

Service Strategy based on Capacity or Capabilities

Process-based

Capacities that transform material or information and provide advantages on dimensions of cost and quality Capacities that are broad-based involving the entire operating system and provide advantages of short lead times and customize on demand Capacities that are difficult to replicate and provide abilities to master new technologies

Systems-based

Organization-based

What is Productivity? Defined

11

Productivity is a common measure on how well resources are being used. In the broadest sense, it can be defined as the following ratio: Outputs Inputs

Total Measure Productivity

Total Measure Productivity = Outputs

Inputs
or
= Goods and services produced All resources used

Partial Measure Productivity

Partial measures of productivity =

Output or Output or Output or Output

Labor Capital Materials Energy

Multifactor Measure Productivity

Multifactor measures of productivity =
Labor +

Output
Capital + Energy

or

Labor +

Output
Capital +

.
Materials

Example of Productivity Measurement

You have just determined that your service

employees have used a total of 2400 hours of labor this week to process 560 insurance forms. Last week the same crew used only 2000 hours of labor to process 480 forms. Which productivity measure should be used?

Answer: Could be classified as a Total Measure or Partial Measure.

Is productivity increasing or decreasing? Answer: Last weeks productivity = 480/2000 = 0.24, and this weeks productivity is = 560/2400 = 0.23. So, productivity is decreasing slightly.

Outline
Global Company Profile: Komatsu
16

Identifying Missions and Strategies

Mission Strategy

Achieving Competitive Advantage Through

Operations

Competing on Differentiation Competing on Cost Competing on Response

Outline - continued
Ten Strategic OM decisions
17

Issues in Operations Strategy

Research Preconditions Dynamics Identify Critical Success Factors Build and Staff the Organization Integrate OM with Other Activities

Strategy Development and Implementation

Learning Objectives
When you complete this chapter, you should be able to : Identify or Define:

18

Mission Strategy Ten Decisions of OM Specific approaches used by OM to achieve strategic concepts Differentiation Low Cost Response

Describe or Explain:

Komatsu Strategies
1960s - licensed design and technology from
19

others; improved quality 1970s - became global enterprise and built export markets aided by increasing value of yen 1980s - joint ventures with Dresser, and manufacturing outside Japan 1990s - used the latest technology to improve quality and drive down costs; focused on electronic engine controls 2000s - increased European presence through ownership and joint ventures

Komatsu Strategies
20

Each strategy established in light of:

threats and opportunities in the environment

strengths and weaknesses of the organization

(related to environment)

Mission
21

Mission - where are you going?

Organizations purpose for being Provides boundaries & focus Answers How can we satisfy peoples needs? Expressed in published statement

1995 Corel Corp.

Sample Mission - Circle K

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As a service company, our mission is to: Satisfy our customers immediate needs and wants by providing them with a wide variety of goods and services at multiple locations.

Sample Mission - Merck

23

The mission of Merck is to provide society with superior products and services - innovations and solutions that improve the quality of life and satisfy customer needs - to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return

Factors Affecting Mission

24

Philosophy & Values Environment Mission Customers Benefit to Society Public Image Profitability & Growth

Mission/Strategy
25

Mission - where you are going Strategy - how you are going to get there

Strategy
26

Action plan to achieve mission Shows how mission will be achieved Company has a business strategy Functional areas have strategies

1995 Corel Corp.

Strategy Process
27

Company Mission Business Strategy

FunctionalArea Area Functional Strategies

Marketing Decisions Operations Decisions Fin./Acct. Decisions

Competitive Advantage Through:

28

Differentiation Cost leadership Quick response

better, cheaper, more responsive

Competing on Differentiation
29

Uniqueness - can go beyond both the physical

characteristics and service attributes to encompass everything that impacts customers perception of value

Competing on Cost
30

Maximum value as perceived by customer Does not imply low value or low quality

Competing on Response
31

Flexible Reliable Rapid

Requires institutionalization within the firm of the ability to respond

Competing On Any Basis

32

Probably requires the institutionalization within

the firm of the ability to change, to adapt

OMs Contribution to Strategy

Operations Decisions
Quality

Examples

33

Specific Strategy Used

FLEXIBILITY

Competitive Advantage

Product
Process Location Layout

Sonys constant innovation of new products Compaq Computers ability to follow the PC market Southwest Airlines No-frills service

Design Volume
LOW COST DELIVERY

Pizza Huts five-minute guarantee at lunchtime Federal Expresss absolutely, positively on time

Speed Dependability
QUALITY

Differentiation (Better)

Human Resource Supply Chain Inventory Scheduling Maintenance

IBMs after-sale service on mainframe computers Fidelity Securitys broad line of mutual funds Motorolas automotive products ignition systems Motorolas pagers

Conformance Performance

Cost leadership (Cheaper)

Response (Faster)

AFTER-SALE SERVICE

BROAD PRODUCT LINE

10 Decision Areas of OM
34

Goods & service design

Quality Process & capacity design Location selection Layout design Human resource and job design Supply-chain management Inventory Scheduling Maintenance

Goods & Services and the 10 Operations Management Decisions

Operations Decisions Goods & services decisions Quality Process and capacity design Goods
Product is usually tangible Objective quality standards Customer not involved in most of process

Services
Product is usually intangible Subjective quality standards Customer may be directly involved in process. Capacity must match demand to avoid lost sales
35

Goods & Services and the 10 Operations Management Decisions

Operations Decisions Location Selection Layout Design Human Resources and Job Design Goods
May need to be near raw materials or labor force Layout can enhance production efficiency Workforce focused on technical skills. Labor standards consistent. Output-based wage system.

Services
Product is usually intangible Subjective quality standards Customer may be directly involved in process. Capacity matches demand to avoid lost sales
36

Goods & Services and the 10 Operations Management Decisions

Operations Decisions Goods Services

Supply-chain relationships Supply chain Supply-chain management relationships critical to important, not necessarily

Inventory Scheduling

final product Raw materials, workin-process, and finished goods Ability to convert inventory may allow leveling of production rates

critical Most services cannot be stored

Primarily concerned with meeting the customer's immediate schedule

37

Goods & Services and the 10 Operations Management Decisions

Operations Decisions Goods Services

Maintenance Maintenance is often

Maintenance is often preventive and takes "repair" and takes place at place at the production the customer's site site

38

Operations Strategies for Two Drug Companies

39

Brand Name Drugs, Inc. Competitive Advantage Product Selection and Design Quality

Generic Drug Corp.

Product Differentiation Low Cost Heavy R&D; Extensive Labs Quality is a major priority; Standards exceed regulatory requirements Little R&D

Meets regulatory requirements on a country-by-country basis as necessary

Operations Strategies for Two Drug Companies - continued

40

Brand Name Drugs, Inc. Processes Product & modular

Generic Drug Corp.

Process focuses production processes General production processes; Long product runs in Job Shop approach, short run; specialized facilities Focus on high utilization Build capacity ahead of demand Still located in city in Recently moved to low tax, low labor cost Location which it was founded environment Many short run products complicate Scheduling Central production planning scheduling

Operations Strategies for Two Drug Companies - continued

41

Brand Name Drugs, Inc. Human Resources Supply Chain Inventory

Hires the best; nationwide searches

Generic Drug Corp.

Very experienced top executives provide direction; other personnel paid below average Long term supplier Tends to purchase competitively relationship to find bargains Maintains high finished Process focus drives up WIP goods inventory, inventory. primarily to ensure all Finished goods inventory tends demands are met to be low

Operations Strategies for Two Drug Companies - continued

42

Brand Name Drugs, Inc. Maintenance Highly trained staff;

Extensive parts inventory

Generic Drug Corp.

Highly trained staff to meet challenging demands

Characteristics of 43High ROI Firms

High quality product

High capacity utilization High operating effectiveness

Low investment intensity

Low direct cost per unit

From the PIMS study of the Strategic Planning Institute

Strategic Options Managers Use to Gain Competitive Advantage

44

28% - Operations Management

18% - Marketing/distribution 17% - Momentum/name recognition

16% - Quality/service
14% - Good management 4% - Financial resources

3% - Other

Strategic Options Managers Use to Gain Competitive Advantage

45

28% Operations Management

Low-

cost product Product-line breadth Technical superiority Product characteristics/differentiation Continuing product innovation Low-price/high-value offerings Efficient, flexible operations adaptable to consumers Engineering research development Location Scheduling

Strategic Options Managers Use to Gain Competitive Advantage 46 continued

18% Marketing/Distribution 17% Momentum/name recognition

16% Quality/service
14% Good management 4% Financial resources

3% Other

Preconditions To Implement a Strategy

47

One must understand: Strengths & weaknesses of competitors and new entrants into the market Current and prospective environmental, legal, and economic issues The notion of product life cycle Resources available with the firm and within the OM function Integration of OM strategy with company strategy and with other functions.

Impetus for Strategy Change

48

Changes in the organization Stages in the product life cycle Changes in the environment

Stages in the Product Life Cycle

49

Growth rate

Introduction
Growth

Maturity
Decline

Strategy and Issues During a Products Life

50

Introduction
Best period to increase market share R&D product engineering critical Company Strategy/Issues

Growth
Practical to change price or quality image Strengthen niche

Maturity
Poor time to change image, price, or quality Competitive costs become critical Defend market position

Decline
Cost control critical

Drive-thru restaurants CD-ROM

Fax machines

Sales
Color copiers HDTV Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focused Enhance distribution Standardization Less rapid product changes - more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting Internet

3 1/2 Floppy disks Station wagons

Little product differentiation Cost minimization Overcapacity in the industry

OM Strategy/Issues

Prune line to eliminate items not returning good margin

Reduce capacity

Strategy & Issues During Product Life 51

Introduction
Company

Strategy & Issues

Best period to increase market share R&D engineering are critical Product design and development are critical Frequent product and process design changes Over-capacity Short production runs High skilled-labor content High production costs Limited number of models Utmost attentions to quality Quick elimination of market-revealed design defects

OM

Strategy & Issues

Strategy & Issues During Product Life

52

Growth
Company Strategy & Issues OM Strategy & Issues
Practical to change prices or quality image Marketing is critical Strengthen niche Forecasting is critical Product and process reliability Competitive product improvements and options Shift toward product oriented Enhance distribution

Strategy & Issues During Product Life

53

Maturity
Company Strategy & Issues
Poor time to increase market share Competitive costs become critical Poor time to change price, image, or quality Defend position via fresh promotional and distribution approaches Standardization Less rapid product changes and more minor annual model changes Optimum capacity Increasing stability of manufacturing process Lower labor skills Long production runs Attention to product improvement and cost cutting Re-examination of necessity of design compromises

OM Strategy & Issues

Strategy & Issues During Product Life

54

Decline
Company Strategy & Issues OM Strategy & Issues
Cost control critical to market share

Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning Good margin Reduce capacity

Strategy Development and Implementation

55

Identify critical success factors Build and staff the organization

SWOT Analysis Process

56

Environmental Analysis

Determine Corporate Mission

Form a Strategy

Identifying Critical Success Factors

57

Marketing
Service Distribution Promotion Channels of distribution Product positioning (image, functions)

Finance/Accounting
Leverage Cost of capital Working capital Receivables Payables Financial control Lines of credit

Production/Operations

Decisions
Product Quality Process Location Layout Human resource Supply chain Inventory Schedule Maintenance

Sample Options
Customized, or standardized Define customer expectations and how to achieve them Facility size, technology Near supplier or customer Work cells or assembly line Specialized or enriched jobs Single or multiple source suppliers When to reorder, how much to keep on hand Stable or fluctuating productions rate Repair as required or preventive maintenance

Critical Success Factors Microsoft & Compaq

58

They

focus on one business They are global Their senior management is actively involved in defining and improving the product development process They recruit and retain the top people in their fields. They understand that speed to market reinforces product quality

Activity Mapping: Southwest Airlines Low Cost Competitive Advantage 59

Courteous, but limited passenger service Lean, productive employees High aircraft utilization

Competitive Advantage: Low Cost

Short haul, point-topoint routes, often to secondary airports Frequent, reliable schedules

Standardized fleet of Boeing 357 aircraft

Activity Mapping: Southwest Airlines Low Cost Competitive Advantage 60

Courteous, but limited passenger service No seat assignments No baggage transfers Automated ticketing machines No meals

Activity Mapping: Southwest Airlines Low Cost Competitive Advantage 61

Lower gate costs at secondary airports

High number of flights, reduces employee idle time between flights

Short haul, point-topoint routes, often to secondary airports

Activity Mapping: Southwest Airlines Low Cost Competitive Advantage 62

High number of flights reduces employee idle time between flights Saturate a city with flights flowering administrative costs per passenger for that city

Frequent, reliable schedules

Activity Mapping: Southwest Airlines Low Cost Competitive Advantage 63

Pilot training on only one type of aircraft Reduced maintenance inventory required because of only one type of aircraft Excellent supplier relations with Boeing has aided financing
Standardized fleet of Boeing 357 aircraft

Activity Mapping: Southwest Airlines Low Cost Competitive Advantage 64

High aircraft utilization

Flexible employees and standard planes aids scheduling Flexible union contracts Maintenance personnel trained on only one type of aircraft 15 minute gate turnarounds

Activity Mapping: Southwest Airlines Low Cost Competitive Advantage 65

Lean, productive employees

High level of stock ownership Hire for attitude, then train High employee compensation Empowered employees Automated ticket machines

Activity Mapping: Southwest Airlines Low Cost Competitive Advantage 66

Courteous, but limited passenger service Lean, productive employees High aircraft utilization

Competitive Advantage: Low Cost

Short haul, point-topoint routes, often to secondary airports Frequent, reliable schedules

Standardized fleet of Boeing 357 aircraft

Vanguards Activity System

67

A broad array of mutual funds excluding some fund categories Very low expenses passed on to client Strict cost control Efficient investment management approach offering good consistent performance

Direct distributions

Straightforward client communication and education

How It Works
68

If competitive advantage, leads to achieving

Company Mission Business Strategy Functional Area Strategies

Distinctive competencies affect

Marketing Decisions

Operations Decisions

Fin./Acct. Decisions