OM handout Chapter Two
CHAPTER TWO
OPERATIONS STRATEGY AND COMPETITIVENESS
2.1 Introduction to operations strategy
2.2 Operations strategy in Manufacturing
2.3 Operations strategy in Services
2.1. Introduction to Operations Strategy
Each of a firm’s strategies should be established in light of (1) the threats and opportunities in
the environment and (2) the strengths and weaknesses of the organization. Ultimately, every
strategy is an attempt to answer the question, “How do we satisfy a customer?” within these
constraints.
Identifying Missions and Strategies: An effective operations management effort must have
a mission so it knows where it is going and a strategy so it knows how to get there.
Mission: Economic success, indeed survival, is the result of identifying missions to satisfy a
customer’s needs and wants.
Definition: We define the organization’s mission as its purpose―what it will contribute to
society. Mission statements provide boundaries and focus for organizations and the concept
around which the firm can rally. The mission states the rationale for the organization’s
existence. Developing a good strategy is difficult, but it is much easier if the mission has been
well defined. The mission can also be thought of as the intent of the strategy―what the
strategy is designed to achieve.
Once an organization’s mission has been decided, each functional area within the firm
determines its supporting mission. By “functional area” we mean the major disciplines
required by the firm, such as marketing, finance /accounting, and production/operations.
Missions for each functional area are developed to support the firm’s overall mission. Then
within that function lower-level supporting missions are established for the operation
management functions.
Strategy: With the mission established, strategy and its implementation can begin. Strategy
is an organization’s action plan to achieve the mission. Each functional area has a strategy for
achieving its mission and for helping the organization reach the overall mission.
These strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses.
Firms achieve missions in three conceptual ways: (1) differentiation, (2) cost leadership, and
(3) quick response. This means operations managers are called on to deliver goods and
services that are (1) better, or at least different, (2) cheaper, and (3) more responsive.
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Operations managers translate these strategic concepts into tangible tasks to be accomplished.
Any one or combination of these three strategic concepts can generate a system that has a
unique advantage over competitors.
Strategies and Tactics: A mission statement provides a general direction for an organization
and gives rise to organizational goals, which provide substance to the overall mission. For
example, one goal of an organization may be to capture a certain percent of market share for
a product; another goal may be to achieve a certain level of profitability. Taken together, the
goals and the mission establish a destination for the organization.
Strategies: are plans for achieving goals. If you think of goals as destinations, then strategies
are the road maps for reaching the destinations. Strategies provide focus for decision-making.
Generally speaking, organizations have overall strategies called organization strategies,
which relate to the entire organization, and they also have functional strategies, which relate
to each of the functional areas of the organization. The functional strategies should support
the overall strategies of the organization, just as the organizational strategies should support
the goals and mission of the organization.
Tactics: are the methods and actions used to accomplish strategies. They are more specific in
nature than strategies, and they provide guidance and direction for carrying out actual
operations, which need the most specific and detailed plans and decision-making in an
organization. You might think of tactics as the “how to” part of the process (e.g., how to
reach the destination, following the strategy road map) and operations as the actual “doing”
part of the process. It should be apparent that the overall relationship that exists from the
mission down the actual operations is hierarchical in nature.
Example- Nina is a high school student in Bahirdar. She would like to have a career in
business, have a good job, and earn enough income to live comfortably.
A possible scenario for achieving her goals might look something like this:
Mission: Live a good life.
Goal: Successful career, good income.
Strategy: Obtain a university education.
Tactics: Select a university and a major; decide how to finance university.
Operations: Register, buy books, takes courses, study.
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Operations Strategy: The organization strategy provides the overall direction for the
organization. It is broad in scope, covering the entire organization. Operation strategy is
narrower in scope, deals primarily with the operations aspect of the organization. Operations
strategy relates to products, processes, methods, operating resources, quality, cost, lead times,
and scheduling. In order for operations strategy to be truly effective, it is important to link it
to organization strategy; that is, the two should not be formulated independently. Rather,
formulation of organization strategy should take into account the realities of operations’
strengths and weaknesses, capitalizing on strengths and dealing with weaknesses. Similarly,
operations strategy must be consistent with the overall strategy of the organization, and
formulated to support the goals of the organization
What is Strategy?
A Strategy is an integrated and coordinated set of commitments and actions designed
to gain a competitive advantage.
Strategic decisions can be classified as those decisions which make major long term
changes to the resource base of the organization in response to external factors such as
markets, customers and competitors.
Operations strategy is concerned with both what the operation has to do in order to
meet current and future challenges and also is concerned with the long-term
development of its operations resources and processes so that they can provide the
basis for a sustainable advantage
Levels of Strategy:
Corporate level
Business level
Functional level
Strategy can be considered to exist at three levels in an organization:
Corporate level strategy: Corporate level strategy is the highest level of strategy. It sets
the long-term direction and scope for the whole organization. If the organization
comprises more than one business unit, corporate level strategy will be concerned with
what those businesses should be, how resources (e.g. cash) will be allocated between
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them, and how relationships between the various business units and between the corporate
centre and the business units should be managed. Organizations often express their
strategy in the form of a corporate mission or vision statement.
Business level strategy: 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. Depending upon the organization’s corporate strategy and the
relationship between the corporate centre and its business units, a business unit’s strategy
may be constrained by a lack of resources or strategic limitations placed upon it by the
centre. In single business organizations, business level strategy is synonymous with
corporate level strategy.
Functional level strategy: The bottom level of strategy is that of the individual function
(operations, marketing, finance, etc.) These strategies are concerned with how each
function contributes to the business strategy, what their strategic objectives should be and
how they should manage their resources in pursuit of those objectives.
OPERATIONS STRATEGY OF MANUFACTURING AND SERVICES
Companies must be competitive to sell their goods and services in the market place.
Competitiveness is an important factor in determining whether a company prospers or fails.
Business organizations compete with one another in variety of ways there are three strategies
(differentiation, cost leadership, and quick response) that provides an opportunity for
operations managers to obtain competitive advantage. Competitive advantage implies the
creation of a system that has a unique advantage over competitors. The idea is to create
customer value in an efficient and sustainable way. Let us briefly look at how managers
achieve competitive advantage via differentiation, low cost, and response.
Competing on Differentiation: Differentiation is concerned with providing uniqueness. A
firm’s opportunities for creating uniqueness are not located within a particular function or
activity, but can arise in virtually everything that the firm does. Moreover, because most
products include some service and most services include some product, the opportunities for
creating this uniqueness are limited only by imagination.
Competing on Cost: One driver of a low-cost strategy is an optimal facility that is
effectively utilized. Low-Cost Leadership: entails achieving maximum value as defined by
your customer. It requires examining each of the different operation management decisions in
a relentless effort to drive down costs while meeting customer expectations of value. A low-
cost strategy does not imply low value or low quality.
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Competing on Response: Response is often thought of as flexible response, but it also refers
to reliable and quick response. Indeed, we define response as including the entire range of
values related to timely product development and delivery, as well as reliable scheduling and
flexible performance.
An operations strategy is concerned with Coordination of operational goals. ‘Operations
strategy concerns the pattern of strategic decisions and actions which set the role, objectives
and activities of operations’. Their use of the term ‘pattern’ implies a consistency in strategic
decisions and actions over time. Strategy in a business organization is essentially about how
the organization seeks to survive and prosper within its environment over the long-term. The
decisions and actions taken within its operations have a direct impact on the basis on which
an organization is able to do this. The way in which an organization secures, deploys and
utilizes its resources will determine the extent to which it can successfully pursue specific
performance objectives.
There are five Operations strategy:
1. Cost: The ability to produce at low cost.
2. Quality: The ability to produce in accordance with specification and without error.
3. Speed: The ability to do things quickly in response to customer demands and thereby
offer short lead times between when a customer orders a product or service and when
they receive it.
4. Dependability: The ability to deliver products and services in accordance with
promises made to customers (e.g. in a quotation or other published information).
5. Flexibility: The ability to change operations. Flexibility can comprise up to four
aspects:
i. The ability to change the volume of production.
ii. The ability to change the time taken to produce.
iii. The ability to change the mix of different products or services produced.
iv. The ability to innovate and introduce new products and services.
Excelling at one or more of these operations performance objectives can enable an
organization to pursue a business strategy based on a corresponding competitive factor.
However, it is important to note that the success of any particular business strategy depends
not only on the ability of operations to achieve excellence in the appropriate performance
objectives, but crucially on customers valuing the chosen competitive factors on which the
business strategy is based. Matching operations excellence to customer requirements lies at
the heart of any operations based strategy.
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Operations Excellence and Competitive Factors:
Operations Strategy Process
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Marketing
Decisions
Functional
FunctionalArea
Area
Strategies
Operations
Company
Mission
Decisions
Business
Strategy
Decisions
Fin./Acct.
Core Competence:
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.
Based on experience, knowledge, and know-how, core competencies represent sustainable
competitive advantages. For this reason, products and technologies are seldom core
competencies. The advantage they provide is short-lived, and other companies can readily
purchase, emulate, or improve on them. Core competencies are more likely to be processes, a
company’s ability to do certain things better than a competitor.
Core competencies are not static. They should be nurtured, enhanced, and developed over
time. Close contact with the customer is essential to ensuring that a competence does not
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become obsolete. Core competencies that do not evolve and are not aligned with customer
needs can become core rigidities for a firm. To avoid these problems, companies need to
continually evaluate the characteristics of their products or services that prompt customer
purchase; that is, the order qualifiers and order winners.
A firm is in trouble if the things it does best are not important to the customer. That’s why it’s
essential to look toward customers to determine what influences their purchase decision.
Order qualifiers are the characteristics of a product or service that qualify it to be
considered for purchase by a customer.
An order winner is the characteristic of a product or service that wins orders in the
marketplace—the final factor in the purchasing decision. Order winner is a criterion
that differentiates the products and services of one firm from another.
For example, when purchasing a DVD or Blu-ray 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.
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 Capacity Capabilities
1. Process-based
Capacities that transforms material or information and provide advantages on
dimensions of cost and quality
2. Systems-based
Capacities that are broad-based involving the entire operating system and provide
advantages of short lead times and customize on demand
3. Organization-based
Capacities those are difficult to replicate and provide abilities to master new
technologies
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