F O U R T H E D I T I O N

Operations Strategy:Defining How Firms Compete

© The McGraw-Hill Companies, Inc., 2003

chapter 2

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Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–2

Chapter ObjectivesChapter Objectives• Introduce the concept of operations strategy and its

various components, and show how it relates to the overall business strategy of the firm.

• Illustrate how operations strategy pertains to adding value for the customer.

• Identify the different ways in which operations strategy can provide an organization with a competitive advantage.

• Introduce the concept of tradeoffs between different strategies and the need for a firm to align its operations strategy to meet the needs of the particular markets it is serving.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–3

Chapter Objectives (cont’d)Chapter Objectives (cont’d)• Explain the difference between order-qualifiers and

order-winners as they pertain to operations strategy.

• Describe how firms are integrating manufacturing and services to provide an overall “bundle of benefits” to their customers.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–4

Managerial IssuesManagerial Issues• Developing and Implementing Effective

Strategies–Meeting the challenges of increased competition

in a globalized business environment.–Keeping up with technology advances.–Learning to do more with less.–Staying ahead of copycat competitors.–Keeping an eye on the future.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–5

Operations Strategy Operations Strategy – An Overview– An Overview• Corporate strategy

–Overall strategy adopted by the firm that defines the specific businesses in which the firm will compete and the way in which resources areacquired and allocated.

CorporateBusiness

FunctionalOperation

al

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–6

Operations Strategy Operations Strategy – An Overview– An Overview• Strategic Business Unit (SBU)

–A stand-alone business within a conglomerate (parent firm) that operates like an independent company.

• Business Strategy–How a strategic business unit (SBU) addresses

the specific markets it serves and products it provides.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–7

Types of Business StrategiesTypes of Business StrategiesType Definition

Low Cost Producing the lowest cost products in the market.

Market Segmentation

Satisfying the needs of a particular market niche.

Product Differentiation

Offering products that differ significantly from the competition.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–8

Operations Strategy Operations Strategy – An Overview– An Overview• Functional Strategies

–Strategy developed by a function (e.g., marketing) within an organization to support the business strategy.

• Competitiveness–A company’s position in the marketplace relative

to its competition.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–9

Operations Strategy Operations Strategy – An Overview– An Overview• Operations Strategy

–How the operations function contributes to competitive advantage.

• Competitive Priorities–How the operations function provides a firm

with a competitive advantage.–Priorities—Low cost, high quality, fast delivery,

flexibility, and service.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–10

What is Operations Strategy?What is Operations Strategy?• Operations Strategy

–Determining how to best utilize the firm’s resources to achieve corporate objectives.

• Major long-term structural issues–How big do we make the facilities?–Where do we locate them?–When do we build them?–What type of process(es) do we install to make

the products?

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–11

Hierarchy of Operational PlanningHierarchy of Operational Planning

Exhibit 2.1Exhibit 2.1

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–12

Operations Strategy Means Operations Strategy Means Adding Value for the CustomerAdding Value for the Customer

““Value is in the eye of the beholder”Value is in the eye of the beholder”What affects customer perceptions of value?What affects customer perceptions of value?

If benefits exceed costs, the customer If benefits exceed costs, the customer perceives value for the product or service.perceives value for the product or service.

Costs TotalBenefits Total ValueCustomer Perceived (2.1)

Costs Total - Benefits Total ValueCustomer Perceived (2.2)

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–13

Maximizing Value Added in OperationsMaximizing Value Added in Operations

Exhibit 2.2Exhibit 2.2

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–14

Operations Strategy Means Operations Strategy Means Adding Value for the CustomerAdding Value for the Customer

• How to add value:–Reduce product costs to customer.–Make the product more readily available.–Provide faster service.–Provide customers with additional relevant

information.–Customize the product to the customer’s

specific needs.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–15

Trends Affecting Operations Trends Affecting Operations Strategy DecisionsStrategy Decisions

• Globalization–Global village with hyper-competition:

• Continuous information technology advances• Lower trade barriers• Lower transportation costs• Emergence of newly industrialized countries (NIC)

with high-growth markets and high standards of living

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–16

Trends Affecting Operations Trends Affecting Operations Strategy Decisions (cont’d)Strategy Decisions (cont’d)

• Technology–Connectivity—anyone, anywhere, all the time–Speed—instantaneous transactions–Intangibility—focus on innovative services to

gain competitive advantage• Simultaneous Competition on Multiple

Competitive Priorities–No traditional trade-offs of priorities

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–17

Competitive PrioritiesCompetitive PrioritiesType Priority

Low Cost Providing low cost products. Controlling costs across the board.

Quality Providing high quality products. Focus is on product and process quality.

Delivery Providing products reliably and quickly.

Flexibility Providing a wide variety of products (mass customization). How fast a firm can produce a new product line.

Service Providing “value-added” service. How products are delivered and supported.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–18

The Next Sources of The Next Sources of Competitive Advantage?Competitive Advantage?

• Two New Trends–The use of environmentally friendly processes

and environmentally friendly products–The use of information

• Large quantities data can now be accurately stored and transmitted inexpensively.

• Competitive advantage can be gained through products and services that provide enhanced levels of feedback.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–19

Developing an Operations Strategy Developing an Operations Strategy from Competitive Prioritiesfrom Competitive Priorities

• Factory Focus and Trade-offs–A factory could not focus on all four competitive

priorities (cost, quality, delivery, and flexibility).• Focusing performance on one priority

limits/eliminates the ability to focus on another priority.

• Plant-within-a-Plant (PWP) concept (Skinner)–Different locations with a facility would focus on

their own competitive priority.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–20

Developing an Operations Strategy Developing an Operations Strategy from Competitive Priorities (cont’d)from Competitive Priorities (cont’d)

• Questioning the Trade-Offs–World-class operations led to the establishment

of a hierarchy among the competitive priorities.• Increased competitive capabilities led to increased

performance on all priorities by all competitors.• Focus shifted from cost minimization to

maximizing the value added.–Customer value is enhanced by the focus on

multiple priorities.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–21

Time Line for Operations StrategiesTime Line for Operations Strategies

Exhibit 2.3Exhibit 2.3

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–22

Example of Trade-Offs onExample of Trade-Offs onSuperior Performance CurvesSuperior Performance Curves

Exhibit 2.4Exhibit 2.4

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–23

Order Qualifiers and Order WinnersOrder Qualifiers and Order Winners• Order Qualifiers

–The minimum characteristics of a firm or its products that a firm must have to be considered as a source of purchase.

• Order Winners–The characteristics of a firm that distinguish it

from its competition so that it is selected as the source of purchase.• ISO-9000 certification

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–24

Distinguishing betweenDistinguishing betweenOrder Qualifiers and Order WinnersOrder Qualifiers and Order Winners

Exhibit 2.5Exhibit 2.5

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–25

Focusing on Core CapabilitiesFocusing on Core Capabilities• Core Capabilities

–Specific strengths that allow a company to achieve its competitive priorities.

–The skill or set of skills that the operations management function develops that allows the firm to differentiate itself from its competitors.

• Focusing is achieved by:–Divesting non-critical activities.–Subcontracting ancillary activities and services.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–26

Integration of Manufacturing and Integration of Manufacturing and ServicesServices

• The Customer’s Activity Cycle (CAC)

Component Actions

Pre-purchase activities Being responsive to customer inquires and the ability to demonstrate technical expertise.

Purchase activities Actual sale and delivery of the product and collecting payment.

Post-purchase activities After-sales service and product warranties

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–27

The Customer’s Activity CycleThe Customer’s Activity Cycle

Exhibit 2.6Exhibit 2.6

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–28

Service Strategies for Manufacturing Service Strategies for Manufacturing Firms Firms

(Wise and Baumgartner)(Wise and Baumgartner)Service Strategy Function

Embedded Services Specific functions that are a part of the product itself.

Comprehensive Services The manufactured product is “married” to additional services.

Integrated Solutions Combining product and services into a seamless offering that addresses a specific customer requirement.

Distribution Control Manufacturing goes downstream to assume responsibility for product distribution.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 2–29

Additional Approaches for Additional Approaches for Integrating Manufacturing and Integrating Manufacturing and

ServicesServices• Demonstration of Knowledge and Expertise

–Reassuring customers by allowing them to view the production process and have access to production employees.

• Customer Training–Providing product training to customers to build

product loyalty and increased use of products.