Operations Strategy

There’s nothing here to take by storm; to strategy we must conform.

Johann Wolfgang von Goethe (Faust,1808)

2Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Principle 1 (Value Maximization) The goal of strategy is to maximize the long run NPV of the organization.

It is not a pure NPV defined for shareholders, it also takes into account stake holders (social responsibilities), as well as environmental impact (sustainability).

Competitive strategy (Business Unit Strategy). Relates a company to its environment. Strengths and weakness of the company (the system) to be related to opportunities and threats in the environment

Chooses an attractive competitive position by offering a high customer value proposition.

Competitive Strategy

3Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Competitive Strategy: Environmental Scanning (Opportunities and Threats)

Competitor activities Complementor activities Changes in consumer needs and preferences Technological changes Economic trends (GNP, unemployment, inflation,

interests, taxes, tariffs) Legal, political, and environmental issues

4Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Competitive Strategy: Competing Edges of the System (Strengths and

Weaknesses) Human Resources (cheap labor, skilled labor, etc.) Technology, Facilities, and Equipment Financial Resources Customers Product and Services Suppliers (low material cost, reliable suppliers) Management Practices (low overhead)

5Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Customer Value Proposition: a set of benefits that the firm offers to customers.

Order Qualifiers: Characteristics that convince customers to consider our product. Order Winners: Characteristics that convince customers to buy our product.

Customers purchase based on the value they derive from a product/service. This value is the greatest amount a customer is willing to pay (the reservation price).

If this value > price, the customer enjoys positive net value (consumer surplus). Customers will buy the service/product that offers highest consumer surplus.

Zara's main business is the design, manufacture, distribution and retailing of clothing. Differentiates itself from rivals timely fashion for the masses. The customer value proposition timely yet limited variety at modest cost and quality.

Customer Value Proposition

6Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Competitive Strategy is Followed by Financial, Marketing, and Operations Strategy

Competitive StrategyFinancial strategy: Source of financial resources and use of funds (how invested).

Marketing and sales strategy:

how the market will

be segmented and how the product will

be positioned

and promoted

Operations Strategy:

Enabling the execution of

the competitive

strategy- how to best deliver the CVP. What

Resources, what

Processes, and what

Competencies.

7Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Organization is a bundle of real recourses. Real Resources

Tangible real resources: human resources (people) and capital resources (property, plant and equipment).

Intangible resources: relationships with suppliers or customers, reputation and brands, technology and know how.

To pay for the real resources, sell pieces of paper; financial resources; securities.

Organizational Resources

8Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

1. How many resources should we invest in? The capacity, in aggregate and per main resources.

2. When should we increase/reduce resources over time? The availability of capacity and the timing of capacity

3. What kinds of resources? HR or CR? The trade-off between capital and human (unsupervised operations). What degree of flexibility? from single-task (hard- targeted towards producing a specific product) to multi-task (flexible- to produce a continuum of products)?

4. Where should the plants be located and what is their roles in the supply chain – each location is responsible for what parts or products. What is the topology connecting these nodes of supply chain? - FedEx: hub-and-spoke, Car companies: tiered or tree. What are the modes of transportation in the network? T? R? A? W? Are the processes standardized or localized; e.g., should Mercedes Benz processes in be similar to the German processes?

Operations Strategy: Resource View

9Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

The process view how resources perform activities and add value. By starting with inputs (customer demands) and ending with outputs (served customer demands), the process view is compatible with a customer-centric view of the world.

From this customer-centric view, value stream mapping defines value from the perspective of the customer: a value-added activity is an activity that benefits the customer.

The process view: a horizontal view of the organization that cuts through functional silos ( finance, accounting, production, marketing sales, etc). It represents inter-functional relationships as well as the external interfaces with customers and suppliers.

Operations Strategy: Process View

10Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

1. Sourcing decisions: make or outsource?, supply network (how many suppliers and how to manage them?), vertical integration.

2. Which technologies ? Four types of technology: Product technology: Is the product designed in modules

or as an integral system? Does the design take into account manufacturability and reusability?

Process technology: The transformation process and methods. The physical layout (job shop vs. flow shop) and material (unit load) flow pattern.

Coordination and IT: Centralized vs. distributed planning and control? planning systems (e.g., ERP), communication technology (e.g., Internet, RF).

Operations Strategy: Process View

11Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Transportation technology: material handling in the plant and transportation network throughout the supply chain. Also includes how insurance policies are moved between the different processing steps.

3. How do we match demand and supply? Demand planning and forecasting, tactical capacity allocation and revenue management; airlines and hotels.

4. How and when do we improve and innovate in products and processes? R&D, continuous improvement, learning and knowledge management.

Operations Strategy: Process View

12Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Values are a third factor that affect what an operation (or an organization) can and cannot do.

Values are the standards by which employees set priorities at every level. Some priorities are programmed into a process but many are not. Ex. whether an order or customer is attractive, whether a suggestion to improve a product or process is attractive, whether an investment is worth making.

As organizations become more complex, consistent values are powerful mechanisms for employees to make independent but consistent decisions.

Values constitute the organization’s culture

Values

13Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

The competency view characterizes the abilities of the organization's resources, processes, and values. Competencies determine the set of outputs that the operation will be particularly good at providing.

1.Cost, including input costs and resource costs. Is important in low margin markets.

2. Flow time. Responsiveness (short flow time) is important due to changes in customer preferences and technologies. Both Flow time and reliability in flow time (standard deviation).

3. Quality. Quality refers to the degree of excellence of the product and process. It has product dimensions such as performance and features and process dimensions such as durability and reliability (retaining high quality over time). Is a key differentiator in luxury and high precision businesses.

4. Flexibility. Ability to change type and volume of the operations.

Operations Strategy: Competency View

14Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Competencies determine the set of outputs that the operation will be particularly good at providing. A premier management consulting company is good at

providing high quality customized advice. An efficient operation such as Mc Donald's is good at

delivering inexpensive food quickly, but from a standard and limited menu with a well-defined quality level.

Zara is good at quickly delivering a large selection of new designs at a reasonable cost.

The Competency View of Operations

15Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Foundations of competencies change over time; they start in resources, gradually migrate to processes, and eventually reside in values.

Most of what gets done in start-up companies is attributable to inputs and resources. Losing a person can be detrimental.

As activities become more recurrent, processes are defined. Alcoa started with low price of electricity, then developed Aluminum smelter processes and exported the processes.

As it becomes clear which business needs should be given highest priority, values emerge. With hundreds of new recruits and departures per year, top management consulting companies remain successful because their processes and values are so strong that project staffing changes have little impact.

The Competency View of Operations

16Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Operations strategy could emerge from a giant optimization model identifying the resources, processes, and competencies to maximize NPV. Not possible.

Principle 2 (Alignment) Operations strategy is a plan for developing resources and configuring processes such that the resulting competencies to align with competitive strategy –customer value proposition - to maximize NPV

A Framework For Operations Strategy

17Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

1. Organization Customer value proposition for each market segment?

2. Operations Prioritize competencies for each market segment?

3. Which resources and processes best provide that competency prioritization? For each targeted customer segment, how the resources (sizing, timing, type, and location) and processes (supply, technology, demand, and innovation management) are configured?

A Framework For Operations Strategy

18Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

A Framework for Operations Strategy

Operations StrategyResources

(Asset Portfolio)Processes

(Activity Network)

SizingHow much capacity toinvest in?

TypeWhat kinds of resources are

best?

TimingWhen increase

or reduce resources?

LocationWhere should resources be

located?

SupplyWhen outsource & how manage

suppliers?

DemandHow match demand to

available supply

TechnologyCoordination,

product, process transportation

InnovationHow and when to improve and

innovate?

Competencies

CompetitiveStrategy

Max NPV

19Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Competitive Product Space

Cost Efficiency (1/cost)

Variety

B

A

Responsiveness

Competitive Product Space: A representation of the firm’s product portfolio in the four dimensional space: Q, C, Var., Res.

One firm: low cost and standardized products

Another firm: expensive and customized products.

20Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Strategic Positioning

Defines those positions that the firm wants to occupy in its competitive product space. The current position, direction, and goal position.

Price

Responsiveness

B

A

High Low

21Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

What distinguishes an effective business process? Operational effectiveness: developing operations

strategy (resources, processes, values, competencies) that support the strategic positioning (customer value proposition) better than the competitors.

How does effective differ from efficient? Cost Efficiency: achieving an output with minimal level

of input and resources Effective Process: supports execution of company’s

strategy

Operational Effectiveness

22Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Focused Strategy, Focused Operations

Focused Strategy: Committing to a limited, congruent set of objectives in terms of demand (product, market) and supply (input, technologies, and volumes).

Aravind Eye Hospital, 100 cataract surgeries a day, operational excellence, 40% gross margin, 70% of patients pay almost nothing, and the hospital does not depend on donations.

A focus process is not limited to a few products. Focused process: one whose products all fall within

a small region of the 4 dimensional product space.

23Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Plant Within Plants (PWP)

PWP: The business strategy is diverse. But the entire business is divided into several mini-plants each with focused processes. One PWP may focus on low cost, the other on quick response.

To sustain competitive advantage, a firm must ensure that its competitors are not able to imitate its chosen position. An sculpture not a block.

Supporting the strategic position with multiple mutually reinforcing activities creates a sustainable competitive advantage. It is harder for competitors to imitate an array of interlocked activities.

24Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Shouldice Hospital, Corolla, Ferrari

Corolla: flow shop, decentralized assembly plants close to market, short flow time, low cost

Ferrari: job shop, only a single plant in Italy, longer flow time, high cost

25Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Focus and the Efficient Frontier in Health-care sector

Cost efficiency

Res

pons

iven

ess

World-classEmergency Room

World-class(non-emergency)Hospital

One general

facility

Efficient operations frontier

26Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Strategic Positioning and Operational Effectiveness

Responsiveness

efficient frontier

A

B

C

PriceHigh Low

the minimal curve containing all current positions in an industry

Firms located on the same ray share strategic priorities.

World class firms are on the efficient frontier.

27Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Firms not on the EF, are not on strict trade-off, they can make simultaneous improvement on more than one dimension.

Firms on EF need to trade-off Trade-off: decreasing on one dimension to increase on

the other dimension. World class firms also try to push the EF outward. As technology and management practices advances, the

EF moves upward. But the impact is not the same in all industries. Internet impact

In book industry pushes EF along both the dimensions of cost and variety

In grocery increases the quality of service to customers, but increases the cost and reduces the responsiveness and variety

Efficient Frontier

28Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Strategic positioning defines the direction of the improvement from current position, and thus the position on the EF the company wants to occupy.

Operational effectiveness measures the distance of the current position to the operations frontier along the direction of improvement. To bring a company closer to a frontier or to push the frontier. (direction is not horizontal)

Strategic Positioning and Operational Effectiveness

29Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

Wal-Mart

Operations Strategy

– Short flow times– Low inventory

Operations Structure– Cross docking– EDI– Fast transportation

system– Focused locations– Communication between

retail stores

Inventory at retail stores Wal-Mart: twice a weekIndustry: once every two weeks.

Sales per square foot Wal-Mart: $102 in 1985 to

$140 in 1991Industry: $112 in 1985 to

$110 in 1991

30Ardavan Asef-Vaziri Jan-1011Operations Strategy: 1- Introduction

This "top-down and outside-in" ensures that operations reflect the intended market position. Market driven strategy creates a customer-driven organization.

In “a bottom-up and inside-out”, the building blocks of strategy are not products and markets, but processes and resources. The value proposition offered to customers seeds in the operational capabilities. The technology driven strategy creates a resource-driven organization.

Market Driven, Technology Driven Strategies