Chapter 2

Operations Strategy
 Learning Objectives

 Explain the role of operations strategy in the

organization.
 Explain the relationship between business strategy
and operations strategy.
 Describe how an operations strategy is developed.
 Identify competitive priorities for the operations
function.
 The concept of strategy
 Strategies are the means by which the enterprise achieves
its objectives.
 They describe the chosen “paths to goal”, or “routes to
achievement” or “plans of campaign”.
 Strategies act as “ground-rules”, and define the nature and
occasion of the decisions needed to achieve enterprise
objectives.
 Strategies determine how the enterprise intends to carry
out its activities during the time horizons to which it is
working, in order to achieve its objectives.
 Meaning of Operations Strategy
 Operations strategy concerns the pattern of strategic
decisions and actions which set the role, objectives and
activities of the operation.

 Operations and operational is different

 ‘Operations’ are the functions that create products and services.

 ‘Operational’ is the opposite of strategic, meaning day-to-day and

detailed.
 It is also conventional to distinguish between the ‘content’
and the ‘process’ of operations strategy.

 The content of operations strategy is the specific decisions

and actions which set the operations role, objectives and
activities.

 The process of operations strategy is the method that is

used to make the specific ‘content’ decisions.
 Role of Operations Strategy
 Most businesses expect their operations strategy to improve
operations performance over time.

 In doing this they should be progressing from a state where they are
contributing very little to the competitive success of the business.

 This means that they should be able to, in turn, master the skills to
first ‘implement’, then ‘support’, and then ‘drive’ operations strategy.
 Implementing business strategy. The most basic role of
operations is to implement strategy.

 Most companies will have some kind of strategy but it is the

operation that puts it into practice.

 You cannot, after all, touch a strategy; you cannot even see
it; all you can see is how the operation behaves in practice.
 Supporting business strategy. Support strategy goes
beyond simply implementing strategy.

 It means developing the capabilities which allow the

organization to improve and refine its strategic goals.

 The better the operation is at doing these things, the more

support it is giving to the company’s strategy.
 Driving business strategy. The third, and most difficult, role
of operations is to drive strategy by giving it a unique and
long-term advantage.

 In fact, success of the whole company’s is based largely

on the unique operations capabilities, which indicates that
operation drives the company’s strategy.
 Stages of Operations Contribution

 There are a four-stages of the role and contribution of the

operations function.

 The stages trace the progression of the operations

function from what is the largely negative role to its
becoming the central element of competitive strategy.
 Stage 1: Internal neutrality. This is the very poorest level of
contribution by the operations function.

 It is holding the company back from competing effectively.

 Paradoxically, its goal is ‘to be ignored’ (or ‘internally neutral’).

 At least then it isn’t holding the company back in any way.

 It attempts to improve by ‘avoiding making mistakes’.

 Stage 2: External neutrality. The first step of breaking out of
stage 1 is for the operations function to begin comparing
itself with similar companies or organizations in the outside
market (being ‘externally neutral’).

 This may not immediately take it to the ‘first division’ of

companies in the market, but at least it is measuring itself
against its competitors’ performance and trying to implement
‘best practice’.
 Stage 3: Internally supportive. Yet, stage 3 operations still aspire
to be clearly and unambiguously the very best in the market.

 They achieve this by gaining a clear view of the company’s

competitive or strategic goals and supporting it by developing
appropriate operations resources.

 The operation is trying to be ‘internally supportive’ by providing a

credible operations strategy.
 Stage 4: Externally supportive. Stage 4 is where the company views the
operations function as providing the foundation for its competitive
success.

 It forecasts likely changes in markets and supply, and it develops the

operations-based capabilities which will be required to compete in future
market conditions.

 Stage 4 operations are innovative, creative and proactive and are driving
the company’s strategy by being ‘one step ahead’ of competitors .
 In general the role of operations strategy is to provide a
plan that makes best use of resources which;
 Specifies the policies and plans for using organizational
resources
 Supports business strategy and thereby corporate
strategy.
 Perspectives on operations strategy
• There are four slightly different views of operations strategy.

[Link] strategy is a top-down reflection of what the

whole group or business wants to do.

[Link] strategy is a bottom-up activity where

operations improvements cumulatively build strategy.

[Link] strategy involves translating market

requirements into operations decisions.
IV. Operations strategy involves exploiting the capabilities of
operations resources in chosen markets.

•None of these four perspectives alone gives the full picture

of what operations strategy is.
•But together they provide some idea of the pressures which
go to form the content of operations strategy.
 The ‘top-down’ view of operations strategy
 The ‘top-down’ perspective views strategic decisions at a number of
levels.

 Corporate strategy sets the objectives for the different businesses which
make up a group of businesses.

 Business strategy sets the objectives for each individual business and
how it positions itself in its marketplace.

 Functional strategies set the objectives for each function’s contribution to

its business strategy. They need to consider what part each function
should play in contributing to the strategic objectives of the business.
 A ‘bottom-up’ view of operations strategy
 The ‘bottom-up’ view of operations strategy sees overall strategy as
emerging from day-to-day operational experience.

 This view is evident when businesses, consult the individual

functions within the business about their constraints and capabilities
during business strategy is reviewed.

 This idea of strategy being shaped by operational level experience

over time is sometimes called the concept of emergent strategies.
 This perspective believes that strategy is gradually shaped
over time and based on real-life experience rather than
theoretical positioning.

 It states that strategies are often formed in a relatively

unstructured and fragmented manner as the future is at
least partially unknown and unpredictable.

 The key virtues required for shaping strategy from the

bottom up are an ability to learn from experience and a
philosophy of continual and incremental improvement.
 The ‘market requirements’ view of operations strategy

 A ‘market requirements’ perspective of operations strategy

sees the main role of operations as satisfying markets.

 No operation that continually fails to serve its markets

adequately is likely to survive in the long term.

 Hence, operations performance objectives and operations

decisions should be primarily influenced by a combination of
customers’ needs and competitors’ actions.
The operations resources perspective to operations strategy

• The ‘operations resource’ perspective of operations strategy is based on the

resource-based view (RBV) of the firm and sees the operation’s core
competences (or capabilities) as being the main influence on operations
strategy.
• This means that the way an organization inherits, or acquires, or develops its
operations resources will, over the long term, have a significant impact on its
strategic success.
• Furthermore, the theory holds that the impact of organizational ‘operations
resource’ capabilities will be at least as great as, if not greater than, that which it
gets from its market position.
 The Process of Operations Strategy
 Although strategies will vary from organization to organization,
they are usually trying to achieve some kind of alignment, or ‘fit’,
between what the market wants, and what the operation can
deliver, and how that ‘alignment’ can be sustained over time.

 So the process of operations strategy should both satisfy market

requirements through appropriate operations resources, and
also develop those resources in the long term so that they can
provide competitive capabilities in the longer term that are
sufficiently powerful to achieve sustainable competitive
advantage.
 Business Strategy is a long range plan and vision.

 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.

 A business strategy serves as an overall guide for the development of

the organization’s operations strategy.
 The operations strategy focuses on developing specific capabilities called
competitive priorities.

 There are five categories of competitive priorities:

1. cost,

2. quality,

3. speed,

4. dependability, and

5. flexibility.
 The quality objective
 Quality is consistent conformance to customers’ expectations, in
other words, ‘doing things right’.

 All operations regard quality as a particularly important objective.

 In some ways quality is the most visible part of what an

operation does.

 Furthermore, it is something that a customer finds relatively easy

to judge about the operation.
 Because of this, it is clearly a major influence on customer
satisfaction or dissatisfaction.

 A customer perception of high-quality products and

services means customer satisfaction and therefore the
likelihood that the customer will return.
 The speed objective
 Speed means the elapsed time between customers
requesting products or services and receiving them.

 The main benefit to the operation’s (external) customers of

speedy delivery of goods and services is that
 the faster they can have the product or service, the more
likely they are to buy it, or the more they will pay for it, or the
greater the benefit they receive .
 The dependability objective
 Dependability means doing things in time for customers to receive their goods or
services exactly when they are needed, or at least when they were promised.

 Customers might only judge the dependability of an operation after the product or
service has been delivered.

 Initially this may not affect the likelihood that customers will select the service –
they have already ‘consumed’ it.

 No matter how cheap or fast a bus service is, if the service is always late (or
unpredictably early) or the buses are always full, then potential passengers will be
better off calling a taxi.
 The flexibility objective
 Flexibility means being able to change the operation in
some way.

 This may mean changing what the operation does, how it

is doing it, or when it is doing it.

 Specifically, customers will need the operation to change

so that it can provide four types of requirement:
 Product/service flexibility: the operation's ability to introduce new or modified
products and services;
 Mix flexibility: the operation's ability to produce a wide range or mix of products
and services;
 Volume flexibility: the operation's ability to change its level of output or activity
to produce different quantities or volumes of products and services over time;
 Delivery flexibility: the operation's ability to change the timing of the delivery of
its services or products.
 The cost objective
 To the companies which compete directly on price, cost will
clearly be their major operations objective.

 The lower the cost of producing their goods and services, the
lower can be the price to their customers.

 Even those companies which do not compete on price will be

interested in keeping costs low.

 Not surprisingly, low cost is a universally attractive objective.

 The ways in which operations management can influence cost
will depend largely on where the operation costs are incurred.

 The operation will spend its money on staff (the money spent on
employing people), facilities, technology and equipment (the
money spent on buying, caring for, operating and replacing the
operation’s ‘hardware’) and materials (the money spent on the
‘bought-in’ materials consumed or transformed in the operation).
 In a summary, competing on Cost implies offering product at a low price
relative to competition
 Typically high volume products.

 Often limit product range & offer little customization.

 May invest in automation to reduce unit costs.

 Can use lower skill labor.

 Probably use product focused layouts.

 Low cost does not mean low quality.

 The Need for Trade-offs
 Decisions must emphasis priorities that support business
strategy

 Decisions often required trade offs

 Decisions must focus on order qualifiers and order winners

 Which priorities are “Order Qualifiers”?

e.g. Must have excellent quality since everyone expects

it
 Order-winning and qualifying
 A particularly useful way of determining the relative importance of competitive
factors is to distinguish between ‘order-winning’ and ‘qualifying’ factors.

 Order-winning factors are those things which directly and significantly

contribute to winning business.

 They are regarded by customers as key reasons for purchasing the product or
service.

 Raising performance in an order-winning factor will either result in more

business or improve the chances of gaining more business.
 Qualifying factors may not be the major competitive determinants of success,
but are important in another way.

 They are those aspects of competitiveness where the operation’s performance

has to be above a particular level just to be considered by the customer.

 Performance below this ‘qualifying’ level of performance will possibly disqualify

the company from being considered by many customers.

 But any further improvement above the qualifying level is unlikely to gain the
company much competitive benefit.
 Qualifying factors are ‘givens’; they are expected by
customers and can severely disadvantage the competitive
position of the operation if it cannot raise its performance
above the qualifying level.

 Less important objectives have little impact on customers

no matter how well the operation performs in them.
 The product life cycle influence on Strategy

 Is useful in understanding the behavior of customers and

competitors.

 The exact form of product life cycles will vary, but generally they are
shown as the sales volume passing through four stages –
introduction, growth, maturity and decline.

 The important implication of this for operations management is that

products and services will require operations strategies in each stage
of their life cycle.
 Introduction stage. When a product or service is first introduced, it is
likely to be offering something new in terms of its design or
performance, with few competitors offering the same product or
service.

 The needs of customers are unlikely to be well understood, so the

operations management needs to develop the flexibility to cope with
any changes and be able to give the quality to maintain
product/service performance.
 Growth stage. As volume grows, competitors may enter the growing
market.

 Keeping up with demand could prove to be the main operations

preoccupation.

 Rapid and dependable response to demand will help to keep

demand buoyant, while quality levels must ensure that the company
keeps its share of the market as competition starts to increase.
 Maturity stage. Demand starts to level off.

 Some early competitors may have left the market and the industry
will probably be dominated by a few larger companies.

 So operations will be expected to get the costs down in order to

maintain profits or to allow price cutting, or both.

 Because of this, cost and productivity issues, together with

dependable supply, are likely to be the operation’s main concerns.
 Decline stage. After time, sales will decline with more
competitors dropping out of the market.

 There might be a residual market, but unless a shortage of

capacity develops the market will continue to be
dominated by price competition.

 Operations priority continue to be dominated by cost.

 Productivity
 Used to measure of process improvement.
 Amount of output relative to input.

Units produced
Productivity =
Inputs used

1-44
 How Would You Measure
Productivity for A Restaurant?
Amount of output (????) per input (????).
Output:
 Number of meals served?
 Number of tables served?
 Number of satisfied customers?

Input:
 Lbs. of food?
 Number of employees?
 Number of tables?

1-45
 Productivity for One Product
Units produced
Productivity =
Inputs used
 Output is easy to measure with one product.
 Input may have many components.
 Parts and subassemblies.
 Labor.
 Equipment.
 Knowledge.
 etc. 1-46
 Productivity Variables

Output
Productivity =
Labor + material + energy + capital +
miscellaneous

 Use a common measure to combine different inputs -

usually $.

1-47
Factor Productivity and Total Factor Productivity

 When productivity is measured separately for each

input resource to the production process, it is called
factor productivity or partial productivity.

 When productivity is measured for all the factors of

production together, it is called total factor
productivity.
 Measuring Productivity

 Total Productivity Measure

Total Productivity = sales/inputs $

 Partial Productivity Measure

Partial Productivity = cars/employee

 Multifactor Productivity Measure

Multi-factor Productivity = sales/total costs
Productivity Example:-
An automobile manufacturer has presented the following data for the past three
years in its annual report. As a potential investor, you are interested in calculating
yearly productivity and year to year productivity gains as one of several factors in
your investment analysis.

2003 2002 2001

2003 2002 2001
Unit car 2,700,000 2,400,000 2,100,000 Partial Prod. Measure
sales
Unit Car Sales/Employee 24.1 21.2 18.3
Employees 112,000 113,000 115,000
Year-to-year Improvement 13.7% 15.8%

Multifactor Prod. Measures

$ Sales $49,000 $41,000 $38,000
(billions$)
Total Cost Productivity 1.26 1.24 1.19

Cost of $39,000 $33,000 $32,000 Year-to-year Improvement 1.6% 4.2%

Sales
(billions)
Which is the best measurement?
50
Productivity Analysis
 For the purposes of studies of productivity for improvement
purposes, the following types of analyses can be carried out:
1. Trend analysis: Studying productivity changes for the
firm over a period of time.

2. Horizontal analysis: Studying productivity in comparison

with other firms of same size and engaged in similar
business.

3. Vertical analysis: Studying productivity in comparison

with other industries and other firms of different sizes in the
same industry.

4. Budgetary analysis: Setting up a norm for productivity for

a future period as budget, based on studies as above, and
planning strategies to achieve it.
Productivity Measurement Problems
 Quality of output should be considered.
 If you produce more, but of lower quality, does
productivity rise?

 External elements may change productivity.

 Wireless communication may raise productivity.

 Precise units of measure may be lacking.

1-52
Productivity can be improved by:

(a) Controlling inputs,

(b) Improving process so that the same input

yields higher output, and

(c) Improvement of technology.

1-53
Modern Dynamic Concept of Productivity

Competition

Higher productivity
Higher share of market

Better value of customers

Factors Affecting Productivity
 Some of the factors influencing productivity rate are:
1. Capital/labour ratio: It is a measure of whether enough
investment is being made in plant, machinery, and tools to make
effective use of labor hours.

2. Scarcity of some resources: Resources such as energy, water

and number of metals will create productivity problems.

[Link]-force changes: Change in work-force effect productivity

to a larger extent, because of the labor turnover.

4. Innovations and technology: This is the major cause of

increasing productivity.
5. Regulatory effects: These impose substantial constraints on some
firms, which lead to change in productivity.
6. Bargaining power: Bargaining power of organized labor to
command wage increases excess of output increases has had a
detrimental effect on productivity.
7. Managerial factors: Managerial factors are the ways an
organization benefits from the unique planning and managerial
skills of its manager.
8. Quality of work life: It is a term that describes the organizational
culture, and the extent to which it motivates and satisfies
employees.
End of chapter two

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