Category Archives: Operations Strategy

Competitive Priorities

Competitive Priorities

The key to developing an effective operations strategy lies in understanding how to create or add value for customers Specifically value is added through the competitive priority or priorities that are selected to support a given strategy Skinner and others initially Identified four basic competitive priorities These were cost quality delivery and flexibility These four priorities translate directly into characteristics that are used to describe various processes by which a company can add value to the products it provides There now exists a fifth competitive priority-service–and it was he primary way in which companies began to differentiate themselves in the 1990

Cost

Within every industry there is uselessly segment of the market that buys strictly on the basis of low cost To successfully compete in this niche a firm must necessarily therefore  be the low-cost producer. But as noted earlier even doing this doesn’t always guarantee profitability and success. Products sold strictly on the basis of cost are typically commodity-like. (Examples of commodities include flour petroleum and  cougar.) In other words customers cannot easily distinguish the products made by one firm from those of another. As a result. customers use cost as the primary determinant in making a purchase. However this segment of the market is frequently very large and many companies are lured by the potential for significant profits which are associated with large unit volumes of product. As a consequence the competition in this segment is exceedingly fierce-and so is the failure rate. After all there can only be one low-cost producer and that firm usually establishes the selling price in the market. As an example  Kmart declared bankruptcy. in January 2002 due primarily to its inability to compete head to head with Wal-Mart based on low prices. Wall-Mart is clearly the low-cost producer in this segment of the retail industry because of its tremendous size which allows it to keep its operating cost down through economies of scale. If Kmart is to survive it will have to find another market niche other than cost on which to compete.

 

Trends Affecting Operations Strategy Decisions

Trends Affecting Operations Strategy Decisions

Two major trends that have significantly impacted the role of operations strategy within an organization are an increasing trend towards the globalization of business and advances in technology especially information technology.

Globalization

As we saw in the first chapter the world is quickly becoming a global village caused in large part by technology As a result competition in most industries has intensified significantly in recent years  and this trend towards hyper-competition is expected to continue. At the same time globalization provides new opportunities for companies in the form of new
previously.untapped markets for their products a well a new sources for raw materials and components at significantly lower costs. This movement towards a single world economy has occurred for several reasons including (a) continued advances in information technology that facilitate the rapid transfer of data across vast distances (b) the growing trend to lower trade barrier as evidenced by Ana and the formation of the European Union. (cl the trend toward lower transportation
costs  and Cd) the emergence of high-growth markets with associated high-profit margin in newly industrialized countries (NIC).3 These new markets can be compared to the saturated markets and shrinking profit margins that are being experienced in the more highly developed countries. For example McDonald's growth in the United States between
1984 and 1994 was 6.4 percent annually while its international sales grew 19.0 percent annually during this same time period." As a result of this globalization of business managers must extend their visions beyond their own national borders when developing operations strategies. This include the location of manufacturing plants in Southeast Asia because of low labor rates or the establishment of call centers in Ireland because of a combination of inexpensive labor. an educated workforce. and the necessary technology infrastructure that exists. In addition to structural strategy decisions such as where to locate a new plant structural issues also must be evaluated when looking to expand a company's operation. strategy globally. Here the education level of the workforce the language and the impact of local laws and customs must be taken into consideration. For example a major attraction for locating in Ireland is its highly educated workforce. As an another illustration employees in Germany can work up to 70 hours in some weeks without being paid overtime and then work as little as 30 hours or less in other weeks as long as the total hours worked over a given time period (such as 6 or 12 months) meets an agreed-upon amount.

Technology

Stan Davis and Chris Meyer in their book entitled Blur identify three factors that are significantly affecting the way in which business is being conducted: (a) connectivity (b) speed and (c) intangibility. They suggest that the combination of all three is causing changes to occur in business at such a rate that managers can only view business today as a blur hence the title of the book All three factors are directly related to advances in technology. Connectivity refers to the fact that virtually everyone is connected low electronically be it through e-mail the Internet the telephone or the fax. At the same time firms with these connected networks in many cases provide' services that are now available 24/7 (24 hours a day seven days a week) in place of the more traditional hours of nine to five Monday through Friday Examples here include banking services stock exchange transactions and airline and hotel reservations. As a result of this connectivity information is transmitted in a matter of seconds or minutes instead of hours or days (or even weeks) which was the previous norm. The combination of connectivity and speed suggests that firms are now focusing on the intangible aspects of their business in order to gain a competitive advantage in the marketplace which translates into providing better and more innovative services. As we shall see shortly technology also has dramatically affected one of the basic concepts in operations strategy: that of making trade-offs between priorities. With advances in technology managers no longer have to make pure trade-offs between competitive priorities as they once did Instead today's technology allows firms to compete on several priorities simultaneously resulting in shifts to superior performance curves (which are described later in the chapter).

Operations Strategy Means Adding Value for the Customer

Operations Strategy Means Adding Value for the Customer

Operations Strategy Means Adding Value
for the Customer

customers perceive value in the product The more the benefits exceed the costs the more value the product provides  In other words.

Untitled

When this ratio is  I customers perceive value the greater the number the more value When this ratio is I customers feel they have overpaid for the product that they have been ripped off and are highly unlikely to buy that product again in the future Another way of looking at this is.

Perceived customer value =Total benefits – Total costs

When the difference between the benefits and costs is positive customers perceive value when it is negative they believe they have overpaid for the product  One of the goals in the development of an operations strategy therefore should be to maximize the value added to the goods and services that are provided by the firm as suggested in Exhibit 2.2. Adding customer value during the transformation process can take many forms and translate into different things to different customers As seen in Equations 2.1 and 2.2 one way to add value is to reduce the cost of the product as when you buy books at Amazon com  Added value to the customer also can mean that the product is more readily available such as when you order groceries online or buy a camera through the Internet Added value can be seen as receiving faster service as when you use the fast lane on the highway to pay a toll automatically or it may take the form of information as when  amazon com tells you what other books have been purchased by buyers who have purchased the same book you bought  or when Expedia com prov ides you with a list of different airlines going t a particular city and a comparison of their air fares  Added value also can take the form of a more customized product be it personal computer from Dell or more personalized service. when  out check into hotel and they know that you have stayed there before and have certain preferences

Untitled

The key element in developing a successful operations strategy is for a firm to provide its customers with additional benefits at an increase in cost that is perceived to be Iess than those benefits.

What is Operations Strategy?

What is Operations Strategy?

Operations strategy is concerned with the development of a long-term plan for determining how to best utilize the major resources of the firm so that there is a high degree of compatibility between these resources and the firm’s long-term corporate strategy Operations strategy addresses very broad questions about how these major resources should be  configured in order to achieve the desired corporate objectives As stated earlier some of the major long-term structural issues addressed in operations strategy include

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?

Each of these issues is addressed-in greater detail in subsequent chapters. In this chapter we want to take a more macroscopic perspective to better understand how these issues are interrelated. In developing an operations strategy management also needs to take other factors into consideration. These include (a) the level of technology that is or will be available. (b) the
required skill levels of the workers and (c) the degree of ‘vertical integration in terms of the extent to which outside suppliers are used. As shown in Exhibit 2.1 operations strategy supports the long-range strategy developed at the SUB level. One might say that decisions at the SUB level focus on being effective that is on doing the right things.’ These decisions are sometimes referred to as strategic planning. Strategic decisions impact intermediate-range decisions. often referred to as tactical planning. which focus on being efficient. that is doing things right.’ Here the emphasis is on when material should be delivered when products should be made to best meet demand and what size the workforce should be. Finally we have planning and control which deals with the day today procedures for doing work. including scheduling inventory management and process management.

A Short History of Operations Strategy

A Short History of Operations Strategy

In the period following World War II corporate strategy in the United States was usually developed by the marketing and finance functions within a company With the high demand for consumer products that had built up during the war years U.S. companies could sell virtually everything they made at comparatively high prices In addition there was very little
international competition The main industrial competitors of the United States today Germany and Japan lay in ruins from massive bombings They could not even satisfy their own markets let alone export globally Within the business environment that existed that time the manufacturing or operations function was assigned the responsibility to produce large quantities of standard products at minimum costs regardless of the overall goals of the firm To accomplish this the operations function focused on obtaining low-cost unskilled labor and installing highly automated assembly-line-type facilities With no global competition and continued high demand the role of operations management (that is to minimize costs) remained virtually unchanged throughout the 1950s and early 1960s By the late 1960s however Wick Skinner of the Harvard Business School who is often referred to as the grandfather of operations strategy recognized this weakness among U.S. manufacturers. He suggested that companies develop an operations strategy that would complement the existing marketing and finance strategies. In one of his early articles on the subject. Skinner referred to manufacturing as the missing link in corporate strategy  Subsequent work in this area by researchers at the Harvard Business School. including Abernathy Clark Hayes and Wheelwright continued to emphasize the importance of using the  strengths of a firm’s manufacturing facilities and people as a competitive weapon in the marketplace as well as taking a longer-term view of how to deploy them.