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1. Introduction to
Operations Strategy
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Operations Strategy
A set of decisions across the value chain
that supports the implementation of
higher-level business strategies.
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Operations Strategy
Another Definition
Operations strategy involves the decisions
which shape the long-term capabilities of
the company's operations and their
contribution to overall strategy through
the on-going reconciliation of market
requirements and operations resources
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Operational Excellence
Lead competition in price &
convenience
Reduce costs & overhead, optimize
processes, efficiency
Examples:
Dell Computer
Wal-Mart
Amazon
Samsung
Apple etc
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Operations Strategy
Adds Value to the Customer
How to add value?
Reduce product costs to customer.
Make the products more easily available.
Provide faster service.
Provide customers with additional relevant
information.
Customize the product to the customer's specific
needs.
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Components of the
Operations Strategy
Product
Design
Procurement
XV
Quality
Management
Schedule
Reliability &
Maintenance
Location
Layout
Operations
Mission and
Strategy
X
/
x\
Inventory
Process
Design
Human
Resources &
Job Design
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Ops Strategy Considerations
A successful operations strategy is consistent
with:
Company strategy
Environmental demands
Competitive demands
The product life cycle
.
. . more
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OM Strategy Considerations
Therefore, an OM strategy also:
Identifies and organizes the OM tasks
Makes the necessary choices within the OM
function
Finds competitive advantage
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Strategies for Competitive
Advantage
Differentiation - Uniqueness in features of products or
services or processes or in a combination of these
Cost leadership - Provide the maximum value as
perceived by customer. Does not imply low value or low
quality or cost cutting by illegal and unethical practices.
Quick response - Flexibility, Reliability, Timeliness.
Requires institutionalization within the firm of the ability to
respond, change and adapt.
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To Implement a Strategy
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.
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Corporate Strategy
A corporate strategy is a set of longrange goals and including statements
about:
the kind of business the company wants to be
in
who its customers are
its basic beliefs about business
its goals of survival, growth, and profitability
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Order Qualifiers and Winners
Qualifiers:
Characteristics of the productservice bundle that gain entry to and maintain a
c o m p a n y 's p o s i t i o n i n a m a r k e t .
Winners: Characteristics that win orders in the
marketplace e.g. product design, new product
introduction speed, lead time, product quality,
service.
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Order Winners (Core
Competencies)
knowledge and skills an
organization has that distinguish it from the
competition.
Typically center on an organizations ability
to integrate a variety of specific
technologies and skills in the development
of new products and services.
Building blocks of core capabilities.
Collective
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Core Competencies
Are basis on which new outputs are
developed.
Better to think of organization in terms of
its portfolio of core competencies than as a
portfolio of products.
developing
Identifying
and
core
competencies is one of top managements
most important roles.
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Examples of core
competencies
Low unit cost for each product/service
Delivery performance - fast, on-time delivery
High quality products/services - customers'
perception of degree of excellence of
product/service
Customer service and flexibility responsiveness
to customer needs
Innovations and rapid product development
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Key Characteristics of Core
Competencies / CapabiIities
Should be used to gain access to a variety of
markets
Should be strongly related to key benefits
provided by products or services
Should be difficult to imitate
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Competitive Priorities
Cannot be a leader in all.
A tradeoff is needed between Cost & Quality,
and Delivery Performance & Flexibility
Identify and nurture one or two dimensions.
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Developing an Operations
Strategy
Corporate
Objective
s
Growth
Survival
Profit
Return on
investment
Other
financial
measures
Marketing
Strategy
Product markets
and segments
Range
Mix
Volumes
Standardization
vc. customization
Level of
innovation
Leader vs.
follower
alternatives
Order
Operations Strategy
winning
Criteria
Process Choice
Infrastructure
Price
Conformance
quality
Delivery speed
Delivery reliability
Volume flexibility
Color ^nge
Product rc >ge
Design
Brand image
Technical support
After sales
support
Choice of alternative
processes
Tradeoffs embodied in
process choice
Role of inventory in
process configuration
Make of buy decisions
and supply chain
Functional support
for operations
Manufacturing
planning and control
management
Capacity size
Capa < ;ty timing
Capacity location
systems
Quality assurance
and control
Manufacturing
systems engineering
Clerical procedures
Compensation
agreements
Work structuring
Organizational
structure
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Positioning Strategies
Process positioning
1
Selecting the manufacturing processes and
operations infrastructure so as to be able to
support the manufacturing / operations
objectives better than the competition
Product positioning
Selecting the types of products and services to
be offered in selected markets so as to meet
customer expectations better than the
competitors
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Positioning Strategies in Mfg.
Type of
Type of
Production
Product
Standard
Custom
Process
Product-focused
Process-focused
Finished-Goods
Inventory Policy
Produce-to-stock
Produce-to-order
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Strategy and Decisions
Corporate strategy
Market analysis
Competitive priorities
Operations strategy
Manufacturing
Services
Standardized services Make-to- stock
Assemble-to-order
Assemble-to-order
Customized services
Make-to-order
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Strategy and Decisions
Corporate strategy
Market analysis
Competitive priorities
Operations strategy
Services
Standardized services
Assemble-to-order
Customized services
Manufacturing
Make-to- stock
Assemble-to-order
Make-to-order
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Strategy and Decisions
Corporate strategy
Market analysis
Competitive priorities
HHUIHH
Operations strategy
Services
Manufacturing
Standardized services Make-to-stock
Assemble-to-order
Assemble-to-order
Customized services
Make-to-order
Process decisions
Quality decisions
Capacity, location, and layout decisions
Operating decisions
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Strategy and Decisions
Corporate strategy
Market analysis
Competitive priorities
Capabilities
Operations strategy
Manufacturing
Services
Standardized services Make-to-stock
Assemble-to-order
Assemble- to-order
Make-to-order
Customized services
Process decisions
Quality decisions
Capacity, location, and layout
decisions
Operating decisions
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Proce
:
High Vol. customization
Process-focused
Job Shops
Mass Customization
(Engineering Industry)
Repetitive (modular)
focus
Assembly line
,
(Cars, appliances, TVs,
fast-food restaurants)
Product-focused
Continuous
( steel, urea, bread)
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Capacity Strategy
capacity before it is needed.
Add
Maintain
excess capacity to satisfy surges in demand
(May serve as order winning dimension).
Let capacity lag behind demand to ensure
maximum capacity utilization
Add capacity on a regular basis, regardless of
short-term changes in demand
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Location Strategy
Availability of resources and production
costs
Financial considerations: exchange
rates, inflation rates, labour productivity
and laws
Have factories in multiple countries
where the product is in demand
Statutory reasons (Home content laws)
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Quality Strategy
How much?
How to maintain and improve?
How to measure?
What to do in case of a complaint by the
customers?
Develop an organizational mechanism
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Technological Capability
Strategy
Maintaining technological capability may be
expensive in the short run, but not having it
may prove fatal in the long run.
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Experience Effects on Cost of
Production
(Refer Learning Curve Case)
Production
cost decreases with cumulative
increase in production.
Make strategic use of experience effects and
economies of scale
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The Next Sources of
Competitive
competitiv Advantage?
friendly processes and
The use of environment
environm<
environment friendly products
Time-based competition
The use of information
Large quantities of data can now be accurately stored
and transmitted inexpensively.
Competitive advantage can be gained through products
and services that provide enhanced levels of feedback.
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Focusing on Core Capabilities
Focusing is achieved by
Divesting non-critical activities.
Subcontracting ancillary activities and services
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Stages in the Product Life Cycle
rate
Growth
Introduction
owth
Maturity
Decine
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Introduction phase
Opportunity to increase market share
R&D and Engineering is critical
Frequent product and process design changes
Short production runs
High production costs
Limited variety
Focus on quality
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Growth phase
Price or quality can be changed
Forecasting critical
Product and process reliability is critical
Increase capacity
Pay attention on sales and distribution
Develop alliances and supply chain
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Maturity phase
It is characterized by large and stable demand
volume
Not advisable to change price or quality during this
phase.
Cost and market differentiators become critical
Focus on best possible production process, least
cost and long production runs.
Best time to make profit
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Decline phase
It is characterized by cut throat competition, falling
demand and over capacity in the industry
Fast replace the item with new products and
control the pipeline inventory
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Activity Mapping: Southwest Airline's
Low Cost Competitive Advantage
No seat
Automated
ticketing machines
Empowered
employees
High employee
compensation
Hire for attitude,
then train
Maintenance
personnel trained
on only one type
of aircraft
No baggage
transfers
Courteous but
Limited Passenger
Service
No meals
(peanuts)
Lower gate costs
at secondary airports
- -
Short Haul, Point to
Point Routes, Often to
Secondary Airports
Lean, Productive
Employees
High level of stock
ownership
20-minute gate
turnarounds
assignments
Competitive Advantage:
Low Cost
High Aircraft
Utilization
High number of
flights reduces
employee idle time
between flights
Frequent Reliable
Schedules
Star
Standardized Fleet
of Boeing 737
Aircraft
Flexible employees
and standard planes
aid scheduling
Excellent supplier Reduced maintenance
relations with
Flexible union
inventory required
Boeing has aided
because of only one
contracts
financing
type of aircraft
Pilot training
required on only
one type of aircraft
Saturate a city with
flights, lowering
administrative costs
(advertising, HR, etc.)
per passenger
for that city
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Attacking through Operations
Appeal to different customer needs
Differentiate from current players
Price, quality, flexibility, speed, innovation
Build consistent operations infrastructure
Integrated values, skills, technologies, relationships, ...
Difficult for competition to duplicate
Build experience and capabilities
Get down the learning curve
Means of building capabilities
Process, systems, and/or organization-based
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Hayes and Upton, "Operattons Based Strategy,' California Mgmt Review,Summer 1998
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Defending through
Operations
How to defend against ops-based attacks?
1.
Exploit own internal strengths
Reemphasize existing capabilities
2.
Attack attacker's ops- based weaknesses
Focus on what attacker cannot do
3.
Emulate attacker's strategy, but faster
Acknowledge threat and respond rapidly
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Hayes and Upton, "Operations- Based Strategy," California Mgmt. Review, Summer 1998.
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Ops Strategy Advantage
Operations-based strategies are robust
Difficult to replicate, slow to diffuse
Require substantial organizational change and
realignment
Impact management philosophy and corporate culture
Dynamic and unpredictable
Continuous improvement, ongoing invention
Learn and adapt quickly
Hayes and Upton, "Operations- Based Strategy,' Catitbmia Mgmt Review, Summer 1998
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Operations- Based Lessons
Ops capabilities cannot be bought of shelf
Ops capabilities take a long time to develop
Develop rapid organizational learning
Ops capabilities often recognized after the fact
Quickly recognize latent threats
Don't ignore small or foreign competitors
Don't strive for "best practice," search for
"new practice"
Push the envelope of the efficient frontier !
Focus! Do fewer things, but do them better...
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Revisiting Operations
Strategy
Regularly plot where the product is on the
life cycle curve
Assess the positions of competitors on the
order winning dimensions
Revise business and operations strategy.
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Wrap-Up: World-Class
Practice
Regularly introduce new products/services
Carry little excess inventory
Follow GLOCAL (Global strategy with local touch)
Quickly adopt and develop new production
technologies
Develop more focused production facilities
Less resistant to strategic alliances and joint
ventures
Consider relevant social issues when setting
strategies
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Further Readings
"Operations- based Strategy
"
Other articles on Strategy and Operations
Strategy as given in the handout
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Agenda for next class
Revise learning curve theory before coming
to the class
Thorough reading of the case "American
Connector Company"
Have a reading of the articles from handout,
included in the first unit of the course
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