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1. Introduction to
Operations Strategy

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Operations Strategy
A set of decisions across the value chain
that supports the implementation of
higher-level business strategies.

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Operations Strategy
Another Definition

Operations strategy involves the decisions

which shape the long-term capabilities of
the company's operations and their
contribution to overall strategy through
the on-going reconciliation of market
requirements and operations resources

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Operational Excellence
Lead competition in price &
convenience
Reduce costs & overhead, optimize
processes, efficiency
Examples:

Dell Computer
Wal-Mart
Amazon
Samsung
Apple etc

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Operations Strategy
Adds Value to the Customer
How to add value?
Reduce product costs to customer.
Make the products more easily available.
Provide faster service.
Provide customers with additional relevant
information.
Customize the product to the customer's specific
needs.

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Components of the
Operations Strategy
Product
Design

Procurement

XV
Quality
Management
Schedule

Reliability &
Maintenance

Location

Layout

Operations
Mission and
Strategy

X
/

x\

Inventory

Process
Design

Human
Resources &
Job Design
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Ops Strategy Considerations

A successful operations strategy is consistent

with:
Company strategy

Environmental demands
Competitive demands
The product life cycle
.

. . more
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OM Strategy Considerations
Therefore, an OM strategy also:
Identifies and organizes the OM tasks
Makes the necessary choices within the OM
function
Finds competitive advantage

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Strategies for Competitive

Advantage
Differentiation - Uniqueness in features of products or
services or processes or in a combination of these
Cost leadership - Provide the maximum value as
perceived by customer. Does not imply low value or low
quality or cost cutting by illegal and unethical practices.

Quick response - Flexibility, Reliability, Timeliness.

Requires institutionalization within the firm of the ability to
respond, change and adapt.

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To Implement a Strategy
One must understand:
Strengths & weaknesses of competitors
and new entrants into the market
Current and prospective environmental,
legal, and economic issues
The notion of product life cycle
Resources available with the firm and
within the OM function
Integration of OM strategy with company
strategy and with other functions.

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Corporate Strategy
A corporate strategy is a set of longrange goals and including statements
about:
the kind of business the company wants to be
in
who its customers are
its basic beliefs about business
its goals of survival, growth, and profitability

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Order Qualifiers and Winners

Qualifiers:

Characteristics of the productservice bundle that gain entry to and maintain a

c o m p a n y 's p o s i t i o n i n a m a r k e t .

Winners: Characteristics that win orders in the

marketplace e.g. product design, new product
introduction speed, lead time, product quality,

service.

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Order Winners (Core

Competencies)
knowledge and skills an
organization has that distinguish it from the
competition.
Typically center on an organizations ability
to integrate a variety of specific
technologies and skills in the development
of new products and services.
Building blocks of core capabilities.

Collective

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Core Competencies
Are basis on which new outputs are
developed.
Better to think of organization in terms of
its portfolio of core competencies than as a
portfolio of products.
developing
Identifying
and
core
competencies is one of top managements
most important roles.

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Examples of core
competencies
Low unit cost for each product/service
Delivery performance - fast, on-time delivery
High quality products/services - customers'
perception of degree of excellence of
product/service
Customer service and flexibility responsiveness
to customer needs
Innovations and rapid product development

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Key Characteristics of Core

Competencies / CapabiIities
Should be used to gain access to a variety of

markets
Should be strongly related to key benefits
provided by products or services
Should be difficult to imitate

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Competitive Priorities
Cannot be a leader in all.
A tradeoff is needed between Cost & Quality,
and Delivery Performance & Flexibility
Identify and nurture one or two dimensions.

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Developing an Operations
Strategy
Corporate
Objective

s
Growth
Survival
Profit
Return on
investment
Other
financial

measures

Marketing
Strategy
Product markets
and segments
Range
Mix
Volumes
Standardization
vc. customization
Level of
innovation
Leader vs.
follower
alternatives

Order

Operations Strategy

winning

Criteria

Process Choice

Infrastructure

Price
Conformance
quality
Delivery speed
Delivery reliability
Volume flexibility
Color ^nge
Product rc >ge
Design
Brand image
Technical support
After sales
support

Choice of alternative
processes
Tradeoffs embodied in
process choice
Role of inventory in
process configuration
Make of buy decisions
and supply chain

Functional support
for operations
Manufacturing
planning and control

management
Capacity size
Capa < ;ty timing
Capacity location

systems
Quality assurance
and control
Manufacturing
systems engineering
Clerical procedures
Compensation
agreements
Work structuring

Organizational
structure

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Positioning Strategies
Process positioning
1

Selecting the manufacturing processes and

operations infrastructure so as to be able to
support the manufacturing / operations
objectives better than the competition

Product positioning
Selecting the types of products and services to
be offered in selected markets so as to meet
customer expectations better than the
competitors

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Positioning Strategies in Mfg.

Type of
Type of

Production

Product
Standard
Custom

Process

Product-focused
Process-focused

Finished-Goods
Inventory Policy
Produce-to-stock
Produce-to-order

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Strategy and Decisions

Corporate strategy

Market analysis
Competitive priorities
Operations strategy

Manufacturing
Services
Standardized services Make-to- stock
Assemble-to-order
Assemble-to-order
Customized services
Make-to-order

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Strategy and Decisions

Corporate strategy

Market analysis

Competitive priorities
Operations strategy

Services
Standardized services
Assemble-to-order
Customized services

Manufacturing
Make-to- stock
Assemble-to-order
Make-to-order

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Strategy and Decisions

Corporate strategy
Market analysis
Competitive priorities

HHUIHH
Operations strategy
Services
Manufacturing
Standardized services Make-to-stock
Assemble-to-order
Assemble-to-order
Customized services
Make-to-order

Process decisions
Quality decisions
Capacity, location, and layout decisions
Operating decisions

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Strategy and Decisions

Corporate strategy

Market analysis
Competitive priorities

Capabilities

Operations strategy
Manufacturing
Services
Standardized services Make-to-stock
Assemble-to-order
Assemble- to-order
Make-to-order
Customized services

Process decisions
Quality decisions
Capacity, location, and layout

decisions
Operating decisions

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Proce

:
High Vol. customization

Process-focused

Job Shops

Mass Customization

(Engineering Industry)

Repetitive (modular)
focus

Assembly line
,

(Cars, appliances, TVs,

fast-food restaurants)

Product-focused

Continuous
( steel, urea, bread)

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Capacity Strategy
capacity before it is needed.

Add
Maintain
excess capacity to satisfy surges in demand
(May serve as order winning dimension).
Let capacity lag behind demand to ensure
maximum capacity utilization
Add capacity on a regular basis, regardless of
short-term changes in demand

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Location Strategy
Availability of resources and production
costs
Financial considerations: exchange
rates, inflation rates, labour productivity
and laws
Have factories in multiple countries
where the product is in demand
Statutory reasons (Home content laws)

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Quality Strategy
How much?
How to maintain and improve?
How to measure?
What to do in case of a complaint by the
customers?
Develop an organizational mechanism

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Technological Capability
Strategy
Maintaining technological capability may be
expensive in the short run, but not having it
may prove fatal in the long run.

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Experience Effects on Cost of

Production
(Refer Learning Curve Case)

Production

cost decreases with cumulative

increase in production.
Make strategic use of experience effects and
economies of scale

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The Next Sources of

Competitive
competitiv Advantage?
friendly processes and
The use of environment
environm<
environment friendly products
Time-based competition
The use of information
Large quantities of data can now be accurately stored
and transmitted inexpensively.
Competitive advantage can be gained through products
and services that provide enhanced levels of feedback.

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Focusing on Core Capabilities

Focusing is achieved by
Divesting non-critical activities.
Subcontracting ancillary activities and services

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Stages in the Product Life Cycle

rate

Growth

Introduction
owth

Maturity

Decine

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Introduction phase
Opportunity to increase market share
R&D and Engineering is critical
Frequent product and process design changes
Short production runs
High production costs
Limited variety
Focus on quality

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Growth phase
Price or quality can be changed
Forecasting critical
Product and process reliability is critical
Increase capacity
Pay attention on sales and distribution
Develop alliances and supply chain

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Maturity phase
It is characterized by large and stable demand
volume
Not advisable to change price or quality during this
phase.
Cost and market differentiators become critical
Focus on best possible production process, least
cost and long production runs.
Best time to make profit

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Decline phase
It is characterized by cut throat competition, falling
demand and over capacity in the industry
Fast replace the item with new products and
control the pipeline inventory

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Activity Mapping: Southwest Airline's

Low Cost Competitive Advantage
No seat
Automated
ticketing machines
Empowered
employees

High employee
compensation

Hire for attitude,

then train

Maintenance
personnel trained
on only one type

of aircraft

No baggage
transfers

Courteous but
Limited Passenger
Service

No meals
(peanuts)

Lower gate costs

at secondary airports

- -

Short Haul, Point to

Point Routes, Often to
Secondary Airports

Lean, Productive
Employees

High level of stock

ownership
20-minute gate
turnarounds

assignments

Competitive Advantage:
Low Cost

High Aircraft
Utilization

High number of
flights reduces
employee idle time
between flights

Frequent Reliable

Schedules
Star
Standardized Fleet
of Boeing 737
Aircraft

Flexible employees
and standard planes
aid scheduling
Excellent supplier Reduced maintenance
relations with
Flexible union
inventory required
Boeing has aided
because of only one
contracts
financing
type of aircraft

Pilot training
required on only
one type of aircraft

Saturate a city with

flights, lowering
administrative costs
(advertising, HR, etc.)
per passenger
for that city

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Attacking through Operations

Appeal to different customer needs
Differentiate from current players
Price, quality, flexibility, speed, innovation

Build consistent operations infrastructure

Integrated values, skills, technologies, relationships, ...
Difficult for competition to duplicate

Build experience and capabilities

Get down the learning curve
Means of building capabilities
Process, systems, and/or organization-based

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Hayes and Upton, "Operattons Based Strategy,' California Mgmt Review,Summer 1998

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Defending through
Operations
How to defend against ops-based attacks?
1.

Exploit own internal strengths

Reemphasize existing capabilities

2.

Attack attacker's ops- based weaknesses

Focus on what attacker cannot do

3.

Emulate attacker's strategy, but faster

Acknowledge threat and respond rapidly

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Hayes and Upton, "Operations- Based Strategy," California Mgmt. Review, Summer 1998.

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Ops Strategy Advantage

Operations-based strategies are robust
Difficult to replicate, slow to diffuse
Require substantial organizational change and
realignment
Impact management philosophy and corporate culture

Dynamic and unpredictable

Continuous improvement, ongoing invention
Learn and adapt quickly

Hayes and Upton, "Operations- Based Strategy,' Catitbmia Mgmt Review, Summer 1998

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Operations- Based Lessons

Ops capabilities cannot be bought of shelf
Ops capabilities take a long time to develop

Develop rapid organizational learning

Ops capabilities often recognized after the fact

Quickly recognize latent threats

Don't ignore small or foreign competitors

Don't strive for "best practice," search for

"new practice"
Push the envelope of the efficient frontier !

Focus! Do fewer things, but do them better...

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Revisiting Operations
Strategy
Regularly plot where the product is on the
life cycle curve
Assess the positions of competitors on the
order winning dimensions
Revise business and operations strategy.

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Wrap-Up: World-Class
Practice

Regularly introduce new products/services

Carry little excess inventory
Follow GLOCAL (Global strategy with local touch)
Quickly adopt and develop new production
technologies
Develop more focused production facilities
Less resistant to strategic alliances and joint
ventures

Consider relevant social issues when setting

strategies

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Further Readings
"Operations- based Strategy
"
Other articles on Strategy and Operations
Strategy as given in the handout

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Agenda for next class

Revise learning curve theory before coming
to the class
Thorough reading of the case "American
Connector Company"
Have a reading of the articles from handout,
included in the first unit of the course

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