CHAPTER 2: OPERATIONS STRATEGY AND COMPETITIVENESS Operations function: responsible for managing

the resources needed to produce the companys

long range plan: helps to maintain a competitive position goods and services
Needs to include:
Companys long-term goals
Understanding of the marketplace
A way to differentiate the company from
its competitors
All other decisions must support this long-range
plan
Functioning of a football team on the field:
Similar to the functioning of a business
Provides a good example of the importance of a
plan or a vision
1. The team prepares a game strategy
2. Each player on the team must perform a Operations strategy- the plan that species the design
particular role to support this strategy and use of resources to support the business strategy
3. Successful football team: unified group of Includes:
players using their individual skills in support of a Location, size, and type of facilities
winning strategy available
BUSINESS STRATEGY - long-range plan of a business, Worker skills and talents required
designed to provide and sustain shareholder value Use of technology
o Must be supported by each of the individual Special processes needed, special
business functions (such as operations, finance equipment
and marketing) Quality control methods
Operations strategy long-range plan for the operations must be aligned with the companys business
function that specifies the design and use of resources to strategy and enable the company to achieve its
support the business strategy long-term plans
Role of everyone in the company: To do his/her EXAMPLE:
job in a way that supports the business strategy FedEx- worlds largest provider of expedited
EXAMPLE: Two companies operating in the same industry, but delivery services
with very different business strategy Business strategy: compete on time and
Southwest Airlines: dependability of deliveries
o Strategy to compete: Cost Operations strategy:
o Offers low cost services aimed at price- To provide speed of delivery, FedEx
sensitive customers acquired its own eet of airplanes
o To support strategy: every aspect of To provide dependability of
Southwests operation focused on cutting deliveries, FedEx invested in a
costs out of the system sophisticated bar-code technology
Singapore Airlines: to track all packages.
o Strategy to compete: Service
o To support strategy: offers free drinks, The Importance of Operations Strategy
complimentary headsets, meals prepared
Operations strategy did not come to the forefront until
by gourmet chefs, comfortable cabins and
the 1970s
even the biggest beds in business class,
Before 1970s:
called the spacebed
U.S companies :
ROLE OF OPERATIONS STRATEGY emphasized mass production of standard
product designs
Role of Operations strategy: provide a plan for the no serious international competitors
operations function so that it can make the best use of its could pretty much sell anything
resources 1970s and 1980s:
Specifies the policies and plans for using the Japanese companies:
organizations resources to support its long-term began offering products of superior quality
competitive strategy at lower cost
 U.S. companies lost market share to their Japanese
counterparts
For U.S to survive:
U.S. companies copied Japanese approaches
(unsuccessful)
Japanese companies operations strategy: All their
resources were specically designed to directly
support the companys overall strategic plan
Michael Porter (Harvard Business School professor) :
Companies often do not understand the differences
between operational efficiency and strategy
Operational efficiency - performing operations tasks
well, even better than competitors
Strategy - plan for competing in the marketplace
Operational efficiency and strategy must be
aligned
You may be very efficiently performing the
wrong task
Role of operations strategy: to make sure that all the
tasks performed by the operations function are the right
tasks
DEVELOPING A BUSINESS STRATEGY
Companys business strategy is developed after its
managers have considered many factors and have made
some strategic decisions
Three factors are critical to the development of
the companys long-range plan, or business
strategy:
1. Developing an understanding of what
business the company is in (the
companys mission)
2. Analyzing and developing an
understanding of the market
(environmental scanning)
3. Identifying the companys strengths
(core competencies)
I. MISSION - denes the company
To develop long-term plan: know exactly what
business you are in, what customers you are
serving, and what your companys values are
Statement that answers three overriding
questions:
1. What business will the company be?
2. Who will the customers be, and what are
the expected customer attributes?
3. How will the companys basic beliefs dene
the business?
Following is a list of some well-known
companies and parts of their mission
statements:
Dell Computer Corporation: to be the
most successful computer company in
the world
Delta Air Lines: worldwide airlines
choice
IBM: translate advanced technologies
into values for our customers as the
worlds largest information service
company
Lowes: helping customers build,
improve and enjoy their homes
Ryder: offers a wide array of logistics
services, such as distribution
management, domestically and globally
EXAMPLE: Dell Computer Corporation has become a
leader in the computer industry in part by following its
mission.
II. ENVIRONMENTAL SCANNING - process of monitoring
the external environment
Includes trends in the:
Market
economic and political
environment
Society
* must be analyzed to determine
business opportunities and threats
What Does Environmental Scanning Tell Us?
allows a company to identify
opportunities and threats
Example:
o In the 1970s Sears, Roebuck and
Company was a retail leader, but it
fell behind the pack in the 1990s.
Environmental scanning would
reveal a threat and we would
have to change our strategy so
as not to be left behind
Just because a company is an
industry leader today does not
mean it will continue to be a
leader in the future.
What Are Trends in the Environment?
External business environment is always
changing
To stay ahead of the competition, a
company must constantly look out for
trends or changing patterns in the
environment, such as MARKETPLACE
TRENDS
changes in customer wants and
expectations and ways in which
competitors are meeting those
expectations
 Example: SOCIAL TRENDS - changes in society that
o Computer industry customers are demanding can have an impact on a business
speed of delivery, high quality, and low price
Dell has become a leader in the industry because III. CORE COMPETENCIES unique strengths of a
of its speed of delivery and low price business
Compaq, have had to redesign their business and To formulate a long-term plan: the
operations strategies to compete with Dell companys managers must know the
Through environmental scanning that companies competencies of their organization
like Compaq:
1. Can see trends in the market
2. Analyze the competition
3. Recognize what they need to do to remain
competitive
Many other types of trends in the
marketplace
E-commerce - one rapidly growing trend
Examples:
Victorias Secret has even used the Internet
to conduct a fashion show in order to boost
sales
Sears, Roebuck, waited and then found
themselves working hard to catch up to the
competition

Highly successful rms develop a business strategy

ECONOMIC TRENDS
that takes advantage of their core competencies
Recession
or strengths
Ination
Increased global competition has driven many
Interest rates
companies to clearly identify their core
General economic conditions
competencies and outsource those activities
Example: Environmental scanning could show that
considered noncore
interest rates are particularly favorable and that this
By outsourcing noncore activities, a company can
may be a good time to go ahead with the purchase.
focus on its core competencies
POLITICAL TRENDS - changes in the political climate
o Outsourcing - obtaining goods or services from an
local, national, and internationalthat could affect a
outside provider
company
Example:
Example:
Meijer, a grocery and general merchandise
The creation of the European Union has had a
retailer, outsources the transportation of all its
signicant impact on strategic planning for such global
merchandise to a company called Total Logistics
companies as IBM, Hewlett-Packard, and PepsiCo
Control (TLC).
Changes in trade relations with China have opened
TLC is responsible for all deliveries, route
opportunities that were not available earlier
scheduling, and all activities involved in
There has been a change in how companies view their
maintaining a eet of trucks, allowing Meijer to
environment, a shift from a national to a global
focus on its core competencies.
perspective
Companies seek customers and suppliers all over the
globe
Changed their strategies in order to take advantage of
global opportunities
o strategic alliances - forming partnerships with
international rms
o Example:
Motorola and Xerox want to take advantage of
opportunities in China and are developing strategic
alliances to help them break into that market
HOW THE MISSION, ENVIRONMENTAL SCANNING, AND CORE
COMPETENCIES HELP IN THE FORMULATION OF THE BUSINESS
STRATEGY
Ongoing process that is constantly allowed to change
As environmental scanning reveals changes in the
external environment, the company may need to change
its business strategy to remain competitive while taking
advantage of its core competencies and staying within its
mission
EXAMPLE: Dell Computer Corporation
Mission:
1. Dened what business Dell is in:
highest quality, leading technology,
computer company
2. Dened Dells customers: focus on
markets served
3. Dened how Dell would do this:
through competitive pricing, best-in-
class service and support, and exible
customization capability
Environmental scanning:
revealed that competing computer
manufacturers, such as IBM and
Compaq, used intermediate resellers to
sell computers
Michael Dells idea was to sell directly
to the customer and be able to put
together exactly the system the
customer wanted within a short time
Core competencies:
exible manufacturing
latest technological offering
Dells business strategy: to take advantage
of an opportunity in the market
DEVELOPING AN OPERATIONS STRATEGY
1.Business strategy
2.Operations strategy
will provide a plan for the design and management
of the operations function in ways that support
the business strategy
relates the business strategy to the operations
function
focuses on specic capabilities of the operation
that give the company a competitive edge
o Competitive priorities - capabilities that the
operations function can develop in order to
give a company a competitive advantage in
its market
COMPETITIVE PRIORITIES
Operations managers must work closely with
marketing in order to understand the
competitive situation in the companys market
before they can determine which competitive
priorities are important
FOUR BROAD CATEGORIES OF COMPETITIVE
PRIORITIES:
1. COST - a competitive priority focusing on
low cost
offering a product at a low price
relative to the prices of competing
products
 Role of the operations strategy: To develop a plan for Ex. McDonalds, where we know we can get the
the use of resources to support this type of competition same product every time at any location
Note:
Low-cost strategy can result in a higher prot margin, A company that competes on this dimension
even at a competitive price. needs to implement quality in every area of the
Low cost does not imply low quality. organization
To develop this competitive priority: the operations Aspects that needs to be addressed:
function must focus primarily on cutting costs in the 1. Product design quality - involves making sure the
system (such as costs of labor, materials, and facilities) product meets the requirements of the
study their operations system carefully to eliminate all customer
waste 2. Process quality - deals with designing a process to
might offer extra training to employees to maximize produce error-free products
their productivity and minimize scrap This includes focusing on equipment, workers,
might invest in automation in order to increase materials, and every other aspect of the
productivity operation to make sure it works the way it is
Generally, companies that compete based on cost: supposed to.
Offer narrow range of products and product features Companies that compete based on quality have to
Allow for little customization address both of these issues:
Have an operations process that is designed to be as 1. The product must be designed to meet customer
efcient as possible needs.
Example: A company that successfully competes on cost 2. The process must produce the product exactly as
is Southwest Airlines it is designed.
Facilities are streamlined: only one type of aircraft is
3. TIME a competitive priority focusing on speed
used, and ight routes are generally short.
and on-time delivery
Minimize costs of scheduling crew changes,
One of the most important competitive priorities
maintenance, inventories of parts, and many
today
administrative costs.
Todays customers dont want to wait, and
Unnecessary costs are completely eliminated:
companies that can meet their need for fast service
there are no meals, printed boarding passes, or
are becoming leaders in their industries
seat assignments
Making time a competitive priority: Competing
Employees are trained to perform many
based on all time-related issues, such as rapid
functions and use a team approach to maximize
delivery and on-time delivery
customer service.
1. Rapid delivery - refers to how quickly an order is
received
2. QUALITY - A competitive priority focusing on the
2. On-time delivery - refers to how often deliveries are
quality of goods and services
made on time
Quality has a subjective meaning; it depends on
3. Development speed - the time needed to take an
who is dening it
idea to the marketplace
Example:
critical in technology and computer software elds
Quality could mean that the product lasts a long
Job of the operations function:
time:
Critically analyze the system
Volvo, a car known for its longevity
Combine or eliminate processes in order to save
Quality might mean high performance:
time.
such as a BMW
o Use technology: To speed up processes
Quality as a competitive priority: focusing on the
o Rely on a exible workforce: To meet peak demand
dimensions of quality that are considered
periods
important by their customers.
o Eliminate unnecessary steps in the production
Quality as a competitive priority has TWO
process
DIMENSIONS:
Example: FedEx
1. High-performance design - operations function
Companys claim: To absolutely, positively deliver
will be designed to focus on aspects of quality
packages on time
such as superior features, close tolerances, high
To support this strategy:
durability, and excellent customer service
Bar- code technology is used to speed up
2. Goods and services consistency - measures how
processing and handling
often the goods or services meet the exact
company uses its own eet of airplanes
design specications
 relies on a very exible part-time workforce
(college students who are willing to work a
few hours at night)
4. FLEXIBILITY - a competitive priority focusing
on offering a wide variety of goods or
services
As a companys environment changes
rapidly, including customer needs and
expectations, the ability to readily
accommodate these changes can be a
winning strategy
Two Dimensions Of Flexibility:
1. Product exibility - ability to offer a wide
variety of goods or services and
customize them to the unique needs of
clients
2. Volume exibility - ability to rapidly
increase or decrease the amount
produced in order to accommodate
changes in the demand
Example: Empire West Inc. - a company
that makes a variety of products out of
plastics, depending on what customers
want.
Companies that compete based on
exibility often cannot compete based
on:
Speed: because it generally requires more
time to produce a customized product.
Cost: because it may take more resources
to customize the product
Flexible companies often offer greater
customer service and can meet unique
customer requirements
To carry out this strategy:
More general-purpose equipment that
can be used to make many different kinds
of products
Workers in exible companies tend to
have higher skill levels and can often
perform many different tasks in order to
meet customer needs
THE NEED FOR TRADE-OFFS - the need to focus more on
one competitive priority than on others.
More resources are dedicated to one priority =
Fewer resources are left for others
The operations function must place emphasis on
those priorities that directly support the
business strategy needs to make trade-offs
between the different priorities
Every business must achieve a basic level of each
of the priorities, even though its primary focus is
only on some.
Plant-within-a-plant (PWP) - suggests that
different areas of a facility be dedicated to
different products with different competitive
priorities
there are multiple plants within one
plant, allowing a company to produce
different products that compete on
different priorities
One way that large facilities with
multiple products can address the issue
of trade-offs
Introduced by well-known Harvard
professor Wickham Skinner
ORDER WINNERS AND QUALIFIERS
To help a company decide which competitive
priorities to focus on, it is important to
distinguish between order winners and order
qualiers
Developed by Terry Hill, a professor at Oxford
University
Order qualiers - are those competitive priorities
that a company has to meet if it wants to do
business in a particular market
Order winners - are the competitive priorities that
help a company win orders in the market
It is important to understand that order winners
and order qualiers change over time.
when one company in a market is
successfully competing using a particular
order winner, other companies follow
suit over time
order winner becomes an industry
standard, or an order qualier
To compete successfully, companies then have to
change their order winners to differentiate
themselves
TRANSLATING COMPETITIVE PRIORITIES INTO
PRODUCTION REQUIREMENTS
1. Identify right competitive priorities
2. Develop a plan to support identified competitive
priorities
3. The operations strategy will specify the design and
use of the organizations resources; that is, it will set
forth specic operations requirements.
These can be broken down into two categories:
1. StructureOperations decisions related to the
design of the production process, such as
characteristics of facilities used, selection of
appropriate technology, and ow of goods and
services through the facility.
 2. Infrastructure Operations decisions related to
the planning and control systems of the
operation, such as organization of the operations
function, skills and pay of workers, and quality
control approaches.
Together, the structure and infrastructure of the
production process determine the nature of the
companys operations function.
The important thing is that every aspect of
production of a product or delivery of a service
needs to focus on supporting the competitive
priority. However, we cannot neglect the other
competitive priorities.
A certain level of order qualiers must be achieved
just to remain in the market.
The issue is not one of focusing on one priority to
the exclusion of the others.Rather, it is a matter
of degree.
Disadvantages:
costly
entails risks (such as overestimating the
benets of the technology or incurring
the risk of obsolescence due to rapid
new inventions)
Technology should be acquired to support the
companys chosen competitive priorities, not just
to follow the latest market fad
Technology may require the com- pany to rethink
its strategy
Measuring Productivity
Productivity - A measure of how efciently an
organization converts inputs into outputs.

STRATEGIC ROLE OF TECHNOLOGY

Types of Technologies
differentiated based on their application, but all
three areas of technology are important to
operations managers
1. Product technology - any new technology
developed by a rm
Ex. Teon, the material used in no-stick fry
pans
2. Process technology - the technology used
to improve the process of creating goods
and services
Ex. Computer- aided design (CAD) and Total Productivity- Productivity computed as a
computer-aided manufacturing (CAM) ratio of output to all organizational inputs.
3. Information technology - enables Partial productivity (single-factor productivity) -
communication, processing, and storage of Productivity computed as a ratio of output to
information. Information technology has only one input (e.g., labor, materials, machines).
grown rapidly over recent years and has measure the productivity of one input
had a profound impact on business variable at a time in order to identify
Ex. Enterprise resource planning (ERP) how efficiently each is being used
which functions via large software Multifactor productivity - Productivity computed
programs used for planning and as a ratio of output to several, but not all, inputs.
coordinating all resources throughout the
entire enterprise

Technology as a Tool for Competitive Advantage

Technology can be acquired to improve processes
and maintain up-to-date standards
Technology can also be used to gain a competitive
advantage:
By acquiring technology a company can
improve quality, reduce costs, and
improve product delivery
Provide an advantage over the
competition
Help gain market share