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Operations Strategy

Theres nothing here to take by storm; to strategy we


must conform.
Johann Wolfgang von Goethe (Faust,1808)

Competitive Strategy

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.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

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

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

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)

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

Competitive Strategy is Followed by Financial,


Marketing, and Operations Strategy
Competitive
Strategy
Financial
strategy:
Source of
financial
resources and
use of funds
(how
invested).

Operations Strategy: 1- Introduction

Marketing
and sales
strategy:
how the
market will be
segmented and
how the
product will be
positioned and
promoted

Ardavan Asef-Vaziri

Operations
Strategy:
Enabling the
execution of
the competitive
strategy- how
to best deliver
the CVP. What
Resources,
what
Processes,
and what
Competencies
.
Jan-1011

Organizational Resources

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.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

Operations Strategy: Resource View


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: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

Operations Strategy: Process View

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 interfunctional relationships as well as the external interfaces
with customers and suppliers.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

Operations Strategy: Process View


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: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

Operations Strategy: Process View

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: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

10

Values

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 organizations culture

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

11

Operations Strategy: Competency View


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: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

12

The Competency View of Operations

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 McDonald'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.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

13

The Competency View of Operations

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.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

14

A Framework For Operations Strategy


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?

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

15

A Framework for Operations Strategy


Max NPV

Competitive
Strategy

Competencies

Resources

Operations Strategy

Processes

(Asset Portfolio)

(Activity Network)

Sizing

Timing

Type

Location

How much
capacity to
invest in?

When increase
or reduce
resources?

What kinds of
resources are
best?

Where should
resources be
located?

Operations Strategy: 1- Introduction

Supply

Technology

Demand

When outsource Coordination,


How match
& how manage product, process
demand to
suppliers?
transportation available supply

Ardavan Asef-Vaziri

Jan-1011

Innovation
How and when
to improve and
innovate?

16

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.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

17

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.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

18

Market Driven, Technology Driven Strategies

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 resourcedriven organization.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

19

Market Driven, Technology Driven Strategies

Organizations must maintain alignment by adopting


both perspectives. In order to satisfy a new customer
need, the firm may need to build new competencies,
processes, and resources. Those operational
capabilities may later be used to invent new products
and services that may create new markets.
Honda's abilities and knowledge in high-performance
engine technology has been the driving force in
deciding which markets to enter and which products
to offer.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

20

Tailor Operations; Strategic Fit

Tailoring fitting the operational system to


competitive strategy.
Frederick Winslow Taylor (the father of scientific
management); there is a "one best way" to configure
any operation.
No, the best operations configuration depends on the
Strategy + Market.
Strategic Operational Audit Does operations
competencies fit with competitive strategy? Where
can improvements be made?
Top-down and bottom-up perspectives simultaneously
and can be performed in three steps.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

21

The Strategic Operational Audit


Understand your customer & your competitive
strategy CVP the current operational system;
resources, processes, and competencies.
2. Apply the resource & process views (bottom-up)
the value propositions the current competencies can
support. Apply the market (top-down) to specify the
competencies, the best-aligned processes and
resources, needed to execute the current strategy.
3. The gaps between the current state and where we
should be to ensure strategic alignment. Gap
reducing actions to improve strategic alignment.
. These actions involve changing the competitive
strategy and/ or changing the operations strategy.
1.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

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Strategic Operational Audit


Deliverable
Value
Propositions

Strategy Gap?

Value
Proposition
Market
view

Resource
view

Competency Gap?

Competencies

Resources

Resource & Process Gap?

&
Processes

Operations Strategy: 1- Introduction

Needed
Competencies

Needed
Resources &
Processes

Ardavan Asef-Vaziri

Jan-1011

23

Zara: Resource View

High vertical integration ownership allows tight


coordination. A design center, some manufacturing
facilities (also outsources locally), two major DCs, and
90% of 724 retail stores.
The design capacity of 11K new styles/yr by over 200
professionals is in line with the timely fashion (design
to rack of 3 weeks).
Owns two central warehouses in Spain. The recent
123,000 m2 DC has a capacity of 80K garments/hr.
Direct access to highway and RR and proximity to
airport favors fast handling of international cargo.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

24

Zara: Resource View

Vertical integration high ratio of tangible fixed


assets to sales of 34%. The average capacity
utilization is 50%, many facilities are single shift.
The supply network centered in Spain (25% from the
rest of Europe and 25% from the rest of the world).
The proximity of suppliers inputs are received
quickly fast speed-to-market. Local facilities are
used to produce the products with most demand
uncertainty and time-sensitivity, off-shoring for basic
products with more predictable demands. Industries
exercising (fast response times + high demand
volatility) experience low capacity utilization

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

25

Zara: Process View; Technology

Postpone the dyeing of fabric: almost half the raw


materials are purchased undyed.
Short lead time for product with high variability in
their demand. Local manufacturing processes have
short setup times and run in small batches, while off
shore manufacturing of more predictable demand can
have longer lead times.
Distribution is highly centralized to reduce the number
of stocking points and the associated handling time
and so that one store's upside demand fluctuations
can offset another's downside.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

26

Zara: Process view; Technology

The hub and spoke system uses the appropriate


transportation mode (truck, RR, or air) depending on
the store location and the time-sensitivity. Frequent
deliveries with short lead times. It maximizes the
flexibility of inputs and increases responsiveness while
controlling working capital (inventory).
IT enables the daily information flow between store
managers (requesting products and providing
customer feedback) and design and production
(sharing information on upcoming products).

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

27

Zara: Process View; Demand

Intentionally short style campaigns that are likely to


run out of stock create a scarcity image. Customers
visit stores frequently and are likely to buy what is
available at that moment because that particular
product may no longer be available next time. The
combination of short campaigns and limited inventory
reduces markdowns and leftovers.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

28

Zara: Process View; Innovation

Fast new product design is a key enabler of Zara's


strategy. Ideas inspired by urban hot spots, fashion
shows, and store customers are transmitted to the
creative teams. Design style platforms are created
ahead of the season and are modified just before
production based on feedback from retailers regarding
the most recent fashion. This postponement of design
styling requires fast and efficient information transfer.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

29

Zara: Process View; Innovation

A firm believer that people, cultures and generations


share a special sensitivity for fashion. Standardizes a
majority of its designs but allows some adjustments to
local taste. Zara originally insisted on a standard set
of sizes for all countries but had to add smaller sizes
for Japan and larger ones for the U.K. and Ger.
Has tailored the 8 drivers of its operations strategy to
its fast-fashion, cheap-chic value proposition.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

30

Should Every Retailer Adopt the Zara Model?

Zara's operational system is not a panacea. Sweden's


Hennes & Mauritz AB competes with Zara. It produces
much fewer new styles per year with a much slower
design-to-rack time of 16 weeks.
Without the stringent speed requirement, H&M has
more leeway in configuring its operations; more
outsourcing and higher capacity utilizations resulting
in much lower fixed capital. The lower safety capacity
and responsiveness is replaced by higher safety stock
to buffer demand uncertainty.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

31

Should every retailer adopt the Zara model?

The Zara model is not used in other industries such as


toy, cell phone, or auto manufacturing. Zara model
requires:
1. High customer willingness to pay for speed-to-market.
2. Short product life cycles with high demand uncertainty.
3. Low cost of excess capacity with low importance of scale
economies.
4. Low cost of stockouts and distribution relative to inventory
holding.

Great operations strategies are tailored to each


company's competitive strategy. While companies
may share some elements, a complete tailored
operations system is unique

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

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