Operations Management

CHAPTER -2 – OPERATIONS STRATEGY & COMPETITIVENESS

2.1 Introduction

For many in business the very idea of an ‘operations strategy’ is a contradiction in terms.
After all, to be involved in the strategy process is the complete opposite of those day-to-day
tasks and activities associated with being an operations manager. Yet at the same time we
know that operations can have a real strategic impact. For many enduringly remarkable
enterprises, from Amazon to IKEA, and from Toyota to Zara – operations resources are
central to long-term strategic success. Moreover, these firms have found that it is the way
they manage their operations that sets them apart from, and above, their competitors. More
generally, all operations need to prevent strategic decisions being frustrated by poor
operational implementation. But the focus of this book, the notion of operations strategy
itself, is to ensure that all operating capabilities provide competitive advantage.

2.2 What is Operations Strategy?

We have used the word ‘strategy’ several times. So what exactly is strategy? Surprisingly, it
is not easy to answer what seems like a straightforward question. Linguistically the word
derives from the Greek word strategos, meaning ‘leading an army’. Strategy is a common
vision that unites an organization, provides consistency in decisions, and keeps the
organization moving in the right direction.

Operations strategy is the total pattern of decisions which shape the long term capabilities of
any type of operation and their contribution to overall strategy, through the reconciliation of
market requirements with operations resources. Operations strategy is concerned with setting
broad policies and plans for using the resources of the firm to best support the firm’s long-
term competitive strategy.

Operations strategy is the development of a long-term plan for using the major resources of
the firm for 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 to achieve the desired corporate objectives. Some of the
major long-term issues addressed in operations strategy include

 How large do we make our facilities?

 What type of process(s) do we install to make the products or provide services?
 What will our supply chain look like?
 What will be the nature of our workforce?
 How do we ensure quality?

Just as there is no overall agreement about what ‘strategy’ means, there is no universal
agreement on how ‘operations strategy’ should be described. Different authors have slightly
different views and definitions of the subject. Between them, four ‘perspectives’ emerge.

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 Operation strategy is a top-down reflection of what the whole group or business

wants to do.
 Operations strategy is a bottom-up activity where operations improvements
cumulatively build strategy.
 Operations strategy involves translating market requirements into operations
decisions.

 Operations strategy involves exploiting the capabilities of operations resources in

chosen markets.

2.3 Operations Management Decisions

Strategic (long-term) decisions - the relevant points over here are-

 How will we make the product?

 Where do we locate the facility or facilities?
 How much capacity do we need?
 When should we add more capacity?

Tactical (intermediate-term) decisions -- the relevant points over here are-

 How many workers do we need?

 When do we need them?
 Should we work overtime or put on a second shift?
 When should we have material delivered?
 Should we have material delivered?
 Should we have a finished goods inventory?

Operational Planning & Control (short-term) decisions - the relevant points over here are-

 What jobs do we work on today or this week?

 Who do we assign to what tasks?

 What jobs have priority?

An operations strategy can be viewed as part of a planning process that coordinates

operational goals with those of the larger organization. Since the goals of the larger
organization change over time, the operations strategy must be designed to anticipate
future needs.
 An operations strategy involves decisions that relate to:
 the design of a process; and,
 The infrastructure needed to support the process.
 Process design includes:
1) The selection of appropriate technology;
2) Sizing the process over time;

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3) The role of inventory in the process; and,

4) Locating the process.
 Infrastructure decisions involve:
1) The logic associated with the planning and control systems;
2) Quality assurance and control approaches;
3) Work payment structures; and,
4) The organization of the operations function.

2.4 Developing a Business Strategy

A company’s business strategy is developed after its managers have considered many factors
and have made some strategic decisions. These include developing an understanding of what
business the company is in (the company’s mission), analyzing and developing an
understanding of the market (environmental scanning), and identifying the company’s
strengths (core competencies). These three factors are critical to the development of the
company’s long-range plan, or business strategy. In this section, we describe each of these
elements in detail and show how they are combined to formulate the business strategy.

Mission

Every organization, from IBM to the Boy Scouts, has a mission. The mission is a statement
that answers three overriding questions:

 What business will the company be in (“selling personal computers,” “operating an

Italian restaurant”)?
 Who will the customers be, and what are the expected customers attributes
(“homeowners,” “college graduates”)?
 How will the company’s basic beliefs define the business (“gives the highest customer
service,” “stresses family values”)?

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 world’s largest
information service company”

Lowe’s: “helping customers build, improve and enjoy their homes”

Ryder: “offers a wide array of logistics services, such as distribution management,

domestically and globally”

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Environmental Scanning

A second factor to consider is the external environment of the business. This includes trends
in the market, in the economic and political environment, and in society. These trends must
be analyzed to determine business opportunities and threats. Environmental scanning is the
process of monitoring the external environment. To remain competitive, companies have to
continuously monitor their environment and be prepared to change their business strategy, or
long-range plan, in light of environmental changes. What Does Environmental Scanning
Tell Us? Environmental scanning allows a company to identify opportunities and threats. For
example, through environmental scanning we could see gaps in what customers need and
what competitors are doing to meet those needs. A study of these gaps could reveal an
opportunity for our company, and we could design a plan to take advantage of it. On the other
hand, our company may currently be a leader in its industry, but environmental scanning
could reveal competitors that are meeting customer needs better—for example, by offering a
wider array of services. In this case, 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. In the 1970s
Sears, Roebuck and Company was a retail leader, but fell behind the pack in the 1990s.

Core Competencies

The third factor that helps define a business strategy is an understanding of the company’s
strengths. These are called core competencies. In order to formulate a long-term plan, the
company’s managers must know the competencies of their organization. Core competencies
could include special skills of workers, such as expertise in providing customized services or
knowledge of information technology. Another example might be flexible facilities that can
handle the production of a wide array of products. To be successful, a company must
compete in markets where its core competencies will have value. Highly successful firms
develop a business strategy that takes advantage of their core competencies or strengths. To
see why it is important to use core competencies, think of a student developing plans for a
successful professional career. Let’s say that this student is particularly good at mathematics
but not as good in verbal communication and persuasion. Taking advantage of core
competencies would mean developing a career strategy in which the student’s strengths could
provide an advantage, such as engineering or computer science. On the other hand, pursuing
a career in marketing would place the student at a disadvantage because of a relative lack of
skills in persuasion.

Increased global competition has driven many companies to clearly identify their core
competencies and outsource those activities considered noncore. Outsourcing is when a
company obtains goods or services from an outside provider. By outsourcing noncore
activities a company can focus on its core competencies.

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2.5 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 it is obvious, 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 as well as 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 barriers as evidenced by NAFTA
and the formation of the European Union, (c) the trend toward lower transportation costs, and
(d) the emergence of high-growth markets with associated high profit margins in newly
industrialized countries (NIC). 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, Jack Smith, the former chairman of General Motors, expects the
growing Asian market, especially China, to be key to the company’s future. China had a
passenger vehicle growth rate of 56 percent in 2002. New vehicle sales in Canada in 2002, in
comparison, increased by 8.5 percent.

As a result of this globalization of business, managers must extend their vision beyond their
own national borders when developing operations strategies. This includes the location of
manufacturing plants in Southeast Asia because of low labor rates, or the establishment of
call centres 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, infrastructural
issues also must be evaluated when looking to expand a company’s operations 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.

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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 now connected 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 to gain a competitive advantage in the marketplace, which
translates into providing better and more innovative services.

Technology has also 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.

2.6 Operations Strategy and Competitiveness

Once a business strategy has been developed, an operations strategy must be formulated. This
will provide a plan for the design and management of the operations function in ways that
support the business strategy. The operations strategy relates the business strategy to the
operations function. It focuses on specific capabilities of the operation that give the company
a competitive edge. These capabilities are called competitive priorities.

By excelling in one of these capabilities, a company can become a winner in its market.

Competitive Priorities

Operations managers must work closely with marketing in order to understand the
competitive situation in the company’s market before they can determine which competitive
priorities are important. There are four broad categories of competitive priorities:

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1. Cost

Competing based on cost means offering a product at a low price relative to the prices of
competing products. The need for this type of competition emerges from the business
strategy. The role of the operations strategy is to develop a plan for the use of resources to
support this type of competition. Note that a low-cost strategy can result in a higher profit
margin, even at a competitive price. Also, low cost does not imply low quality. Let’s look at
some specific characteristics of the operations function we might find in a company
competing on cost.

2. Quality

Many companies claim that quality is their top priority, and many customers say that they
look for quality in the products they buy. Yet quality has a subjective meaning; it depends on
who is defining it. For example, to one person quality could mean that the product lasts a
long time, such as with a Volvo, a car known for its longevity. To another person quality
might mean high performance, such as a BMW. When companies focus on quality as a
competitive priority, they are focusing on the dimensions of quality that are considered
important by their customers.

Quality as a competitive priority has two dimensions. The first is high-performance design.
This means that the operations function will be designed to focus on aspects of quality such
as superior features, close tolerance, high durability, and excellent customer service. The
second dimension is goods and services consistency, which measures how often the goods or
services meet the exact design specifications. A strong example of product consistency is
McDonald’s, where we know we can get the same product every time at any location.
Companies that compete on quality must deliver not only high-performance design but goods
and services consistency as well.

3. Time or speed is one of the most important competitive priorities today. Companies in all
industries are competing to deliver high-quality products in as short a time as possible.
Companies like FedEx, Lens Crafters, United Parcel Service (UPS), and Dell compete based
on time. Today’s customers don’t want to wait, and companies that can meet their need for
fast service are becoming leaders in their industries.

4. Flexibility

As a company’s environment changes rapidly, including customer needs and expectations,

the ability to readily accommodate these changes can be a winning strategy. This is
flexibility. There are two dimensions of flexibility. One is the ability to offer a wide variety
of goods or services and customize them to the unique needs of clients. This is called product
flexibility. A flexible system can quickly add new products that may be important to
customers or easily drop a product that is not doing well. Another aspect of flexibility is the
ability to rapidly increase or decrease the amount produced in order to accommodate changes
in the demand. This is called volume flexibility.

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2.7 Operations Strategy in Manufacturing and Service Organizations

2.7.1 Operations Strategy in Manufacturing

Manufacturing companies help their clients by building a strategy which focuses on who,
what and where of the global manufacturing network. They help clients by build capabilities
to integrate the network, creating visibility and transparency. As a result, they develop better
collaboration and communication with partner networks, minimizing the risk of delays and
keeping the supply chain free of defects. In addition, they help clients focus on driving
operational excellence within their manufacturing operations to meet cost and quality
objectives. They also help their clients enable strategy and execution with the latest thinking
in technology. At their innovation centers for manufacturing located in location,
manufacturing executives will get a glimpse into the future of manufacturing; access
innovative ideas, technology and strategies; and develop a road map to help reach their
objectives.

They have demonstrated experience in helping their clients to achieve significant

improvements:

 Increase revenues through new market entry and strategic merger and acquisition.
 Decrease cost of goods sold
 Reduce working capital
 Improve asset utilization
 Increase efficiency

Manufacturing research and experience has shown that manufacturing is critical to

companies’ growth strategies. There are many decisions to consider when building and
executing the appropriate manufacturing strategy. Understanding how these decisions link to
the overall business strategy and impact the company’s financial performance is one of the
most effective ways companies can progress toward high performance. These concepts can
be summarized as follows:

 Deep manufacturing experience. Firms should have extensive experience helping

clients transform their manufacturing strategy and operations and have invested
heavily in our methods, software solutions and people. This combined with deep
knowledge of the industries we serve is our competitive advantage.

 Rapid time to value. Their methodologies, frameworks and tools will identify quick
value opportunities while also minimizing design risk. Firms will quickly validate
how to drive value from improvements in manufacturing by enhancing functional
capabilities and enabling technologies.

 Optimal mix of strategy, process, execution and technology. Certain companies are
unique among its competitors: their capabilities cover the full project life cycle from
strategy to execution to enable our clients’ success at every point of their
transformation journey.

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2.7.2 Operations Strategy in Service

Issues regarding operations strategy content and process are often discussed in the current
operations literature. The process of operations strategy is termed according to how strategic
decisions are made in an organizational setting. Definitions of strategy always mention
enhancement of the firm’s competitive position in the marketplace through resources building
or positioning.

Traditionally OM literature has addressed service operations strategy to the development of

the service delivery system in order to match the customer expectations with customer
perceptions. Models and frameworks have been suggested to explain this process through
different services classifications and schemes. However, only a few studies analyze the
differentiation and interaction between the different dimensions configuring the service
operations strategy. In this context, Arias-Aranda (2002) proposed a model based on the three
basic operations strategies identified in service literature according to the firm’s focus of
activities. These basic operations strategies pursued by service industries are process, service
or customer-oriented operations strategies. He also identified nine structural and
infrastructural decisions that lead to a determined service operations strategy. These are type
of operations layout, PUSH/PULL orientation of the service delivery process, degree of
process standardization, number of different services offered, use of information technologies
(cost reduction vs. service improvement), back and front office activities relationship, human
resources specialization, degree of customer participation, and new service design and
development.

Service Flexibility

Flexibility as a competitive goal still lacks a clear and accurate definition. In service firms,
flexibility is a fuzzy concept, as not all service flexibility dimensions have been clearly
determined. However, flexibility is generally accepted as a useful tool to improve the
competitive position of the firm, especially when related to the process of decision-making in
technologies adoption and implementation. Slack (1987) analyzed a sample of ten
manufacturing firms concluding that managers’ vision of the flexibility concept is only partial
and incomplete. Managers usually focus more on machines flexibility than on the overall
system flexibility. Flexibility when focused only on technology implementation does not lead
to a competitive advantage. It is crucial to carefully plan and manage the whole system
flexibility by creating a plant infrastructure that allows such system flexibility.

Flexibility in services involves the introduction of new designs and services into the service
delivery system quickly, adjust capacity rapidly, customize services, handle changes in the
service mix quickly and handle variations in customer delivery schedules

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Performance Measures

Performance measures reflect how well the different competitive priorities fit in the
implemented operations strategy. For service industries, effective performance measures
related to operations strategies require a shift from measures that focus on manufacturing
efficiency to those capturing the critical success factors related to customer initiated
demands. Nowadays, service operations managers need relevant and specific feedback in
order to take effective decisions in a changing environment. Non-financial measures
contribute to enhance performance within these environments, as they deal with causes
instead of effects. Hence, managers have an incentive to maximize performance on those
activities on which their performance is measured. As such, the dimensions of operations
strategy need to be embedded in the performance measurement system in order to be
enhanced.

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