Operations Strategy

Session 1 - Introduction

Objectives of the session

Perspectives of operations strategy
To explore the ideas of operations strategy
Appreciating the role of operations strategy in attaining
competitive advantage

The operations function is fashionable!

The consultancy services market
% of world revenues of 40 largest firms
Financial
6
Organizational
design
11

Marketing/sales
2

Operations and process

management
31

Benefits/Actuarial
16

IT strategy
17

Nigel Slack and Michael Lewis

2003

Corporate strategy
17

Operations Strategy in a
Global Environment

PowerPoint presentation to accompany

Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e
PowerPoint slides by Jeff Heyl

2011 Pearson Education, Inc. publishing as Prentice Hall

2-4

What is operations?
Operations is the activity of managing the
resources and processes that produce and
delivery goods and services
All operations transform the resource inputs into
outputs of products or services

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2-5

What is strategy?

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2-6

Developing Missions and

Strategies
Mission statements tell an
organization where it is going
The Strategy tells the
organization how to get there

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Mission
Mission - where are
you going?
Organizations
purpose for being
Answers What do
we provide society?
Provides boundaries
and focus

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2-8

Hard Rock Cafe

Our Mission: To spread the spirit of
Rock n Roll by delivering an
exceptional entertainment and dining
experience. We are committed to being
an important, contributing member of
our community and offering the Hard
Rock family a fun, healthy, and
nurturing work environment while
ensuring our long-term success.
Figure 2.2
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Operations strategy is ..
the decisions which shape the longterm capabilities of the companys
operations and their contribution to overall
strategy through the on-going
reconciliation of market requirements and
operations resources
Nigel Slack and Michael Lewis 2003

2 - 10

What is operations strategy?

Top down approach
What the whole group wants to do or achieve

Bottom up approach
Operations improvements cumulatively adds up to
strategy

Exploiting the capabilities of operations

resources
Translating the market requirements into
operations decisions

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Videos
https://www.youtube.com/watch?v=ZRcDVm6G50Y
(Introduction by Nigel slack)

https://www.youtube.com/watch?v=NVeg4MWOux
E
(Hard Rock Caf)
https://www.youtube.com/watch?v=okmoQ7tNf3Q
(Video for process design)

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Demand

Time scale

Short-term
for example, capacity
decisions
1-12 months

Operations strategy
Long-term
for example, capacity
decisions

Demand

Operations management

1-10 years

Micro
level of the process

Macro
level of the total operation

Level of
aggregation

Detailed
For example
Can we give tax services to
the small business market in
Antwerp?

Aggregated
For example
What is our overall business
advice capability compared
with other capabilities?

Level of
abstraction

Concrete
For example
How do we improve our
purchasing procedures?

Level of
analysis

Philosophical
For example
Should we develop strategic
alliances with suppliers?

Operations strategy is different to operations

management
Nigel Slack and Michael Lewis 2003

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Why operations strategy?

Operational efficiency?
Productivity?
Focussed factory

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Case discussions
Case 1: Chandler
Case 2: Galanz

2-15

2 - 15

Chandler
Free trade (Economic factors)
Locational factors
Capacity, expansion of capacities

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2 - 17

Growth of World Trade

35
30

Percent

25

Collapse of the
Berlin Wall

20
15
10
5
0
|
|
|
|
|
|
|
|
|
|
|
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 (est*)
Year
Figure 2.1

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Some Multinational
Corporations
Company
Citicorp
ColgatePalmolive
Dow
Chemical
Gillette
Honda
IBM
2011 Pearson Education, Inc. publishing as Prentice Hall

Home
Country

% Sales
Outside
Home
Country

% Assets
Outside
Home
Country

% Foreign
Workforce

USA
USA

34
72

46
63

NA
NA

USA

60

50

NA

USA
Japan
USA

62
63
57

53
36
47

NA
NA
51
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Some Multinational
Corporations
Company

Home
Country

ICI
Britain
Nestle
Switzerland
Philips
Netherlands
Electronics
Siemens
Germany
Unilever
Britain &
Netherlands

2011 Pearson Education, Inc. publishing as Prentice Hall

% Sales
Outside
Home
Country

% Assets
Outside
Home
Country

% Foreign
Workforce

78
98
94

50
95
85

NA
97
82

51
95

NA
70

38
64

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Reasons to Globalize
Reasons to Globalize
Tangible 1. Reduce costs (labor, taxes, tariffs, etc.)
Reasons 2. Improve supply chain
3. Provide better goods and services
4. Understand markets
Intangible 5. Learn to improve operations
Reasons 6. Attract and retain global talent

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Sample Missions
Sample OM Department Missions
Product design

To design and produce products and

services with outstanding quality and
inherent customer value.

Quality management

To attain the exceptional value that is

consistent with our company mission and
marketing objectives by close attention to
design, procurement, production, and field
service operations

Process design

To determine, design, and produce the

production process and equipment that will
be compatible with low-cost product, high
quality, and good quality of work life at
economical cost.

Figure 2.3
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Sample Missions
Sample OM Department Missions
Location

To locate, design, and build efficient and

economical facilities that will yield high
value to the company, its employees, and the
community.

Layout design

To achieve, through skill, imagination, and

resourcefulness in layout and work
methods, production effectiveness and
efficiency while supporting a high quality of
work life.

Human resources

To provide a good quality of work life, with

well-designed, safe, rewarding jobs, stable
employment, and equitable pay, in exchange
for outstanding individual contribution from
employees at all levels.

Figure 2.3
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Sample Missions
Sample OM Department Missions
Supply-chain
management

To collaborate with suppliers to develop

innovative products from stable, effective,
and efficient sources of supply.

Inventory

To achieve low investment in inventory

consistent with high customer service levels
and high facility utilization.

Scheduling

To achieve high levels of throughput and

timely customer delivery through effective
scheduling.

Maintenance

To achieve high utilization of facilities and

equipment by effective preventive
maintenance and prompt repair of facilities
and equipment.
Figure 2.3

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Strategic Process
Organizations
Mission

Functional
Area Missions

Marketing

2011 Pearson Education, Inc. publishing as Prentice Hall

Operations

Finance/
Accounting
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Strategies for Competitive

Advantage
Differentiation better, or at
least different
Cost leadership cheaper
Response rapid response

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Competing on
Differentiation
Uniqueness can go beyond both the
physical characteristics and service
attributes to encompass everything
that impacts customers perception
of value
Safeskin gloves leading edge products
Walt Disney Magic Kingdom
experience differentiation
Hard Rock Cafe dining experience
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Competing on Cost
Provide the maximum value as
perceived by customer. Does not
imply low quality.
Southwest Airlines secondary
airports, no frills service, efficient
utilization of equipment
Wal-Mart small overhead, shrinkage,
distribution costs
Franz Colruyt no bags, low light, no
music, doors on freezers
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Competing on Response
Flexibility is matching market changes in
design innovation and volumes
A way of life at Hewlett-Packard

Reliability is meeting schedules

German machine industry

Timeliness is quickness
in design, production,
and delivery
Johnson Electric,
Pizza Hut, Motorola
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SAMPLE STRATEGIES
Organizational Strategy

Operations Strategy

Examples of Companies or Services

Low Price

Low Cost

U.S. first-class postage

Wal-Mart

High Quality

High performance design and/or high

quality processing

Sony TV
Lexus, Cadillac,

Consistent Quality

Coca-Cola; Kodak, Motorola

Quick Response(rapid delivery)

McDonalds Restaurants
Express mail
FedEx; One-hour photo

Short Time

On-time delivery
Newness

Innovation

3M
Express mail

Flexibility

Variety
Volume

Burger King (Have it your way)

McDonalds (Buses Welcome)

Service

Superior customer service

Disneyland
IBM

Location

Convenience

2-30

Supermarkets, Banks, ATMs

Mall Stores

OMs Contribution to Strategy

10 Operations
Decisions
Product
Quality
Process

Approach
DIFFERENTIATION
Innovative design
Broad product line
After-sales service
Experience

Location
Layout

COST LEADERSHIP
Low overhead

Human
resource

Effective capacity
use

Supply chain

Inventory
management

Inventory
Scheduling
Maintenance

RESPONSE
Flexibility
Reliability
Quickness

Example

Competitive
Advantage

Safeskins innovative gloves

Fidelity Securitys mutual
funds
Caterpillars heavy equipment
service
Hard Rock Cafs dining
experience
Franz-Colruyts warehousetype stores

Differentiation
(better)

Southwest Airlines
aircraft utilization
Wal Marts sophisticated
distribution system
Hewlett-Packards response to
volatile world market
FedExs absolutely, positively,
on time
Pizza Huts 5-minute guarantee

Response
(faster)
Cost
leadership
(cheaper)

Figure 2.4

at lunchtime
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STRATEGIC OM DECISION AREAS

Decision Area

What the Decisions Affect

Product and service

design

Costs, quality, liability, and environmental issues

Capacity

Cost, structure, flexibility

Process selection and

layout

Costs, flexibility, skill level needed, capacity

Work design

Quality of work life, employee safety, productivity

Location

Costs, visibility

Quality

Ability to meet or exceed customer expectations

Inventory

Costs, shortages

Maintenance

Costs, equipment reliability, productivity

Scheduling

Flexibility, efficiency

Supply chains

Costs, quality, agility, shortages, vendor relations

Projects

Costs, new products, services, or operating systems

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Tools for strategy formulation

SWOT analysis
Porters five forces
Resource based view of strategy
Core competencies
Disruptive strategies
Blue-ocean strategies

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Strategy Development Process

Analyze the Environment
Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.

Determine the Corporate Mission

State the reason for the firms existence and identify the
value it wishes to create.

Form a Strategy
Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability, aftersale service, broad product lines.
Figure 2.6
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Strategy Development and

Implementation
Identify key success factors
Build and staff the organization
Integrate OM with other activities
The operations managers job is to implement
an OM strategy, provide competitive
advantage, and increase productivity
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Key Success Factors

Support a Core Competence and Implement Strategy by
Identifying and Executing the Key Success Factors in the Functional Areas

Marketing
Service
Distribution
Promotion
Channels of distribution
Product positioning
(image, functions)

Decisions
Product
Quality
Process
Location
Layout
Human resource
Supply chain
Inventory
Schedule
Maintenance

2011 Pearson Education, Inc. publishing as Prentice Hall

Finance/Accounting

Production/Operations

Leverage
Cost of capital
Working capital
Receivables
Payables
Financial control
Lines of credit

Sample Options
Customized, or standardized
Define customer expectations and how to achieve them
Facility size, technology, capacity
Near supplier or near customer
Work cells or assembly line
Specialized or enriched jobs
Single or multiple suppliers
When to reorder, how much to keep on hand
Stable or fluctuating production rate
Repair as required or preventive maintenance

Chapter
5
6, S6
7, S7
8
9
10
11, S11
12, 14, 16
13, 15
17

Figure 2.7

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Implementation and Evaluation

Balanced Scorecards
Strategy maps
Management by objectives

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Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service
Lean,
Productive
Employees

Short Haul, Point-toPoint Routes, Often to

Secondary Airports

Competitive Advantage:
Low Cost
High
Aircraft
Utilization

2011 Pearson Education, Inc. publishing as Prentice Hall

Standardized
Fleet of Boeing
737 Aircraft

Frequent,
Reliable
Schedules
Figure 2.8
2 - 38

Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service
Lean,
Productive
Employees

Short Haul, Point-toPoint Routes, Often to

Secondary Airports

Aircraft
Utilization

Reliable
Schedules

Automated ticketing machines

Competitive
Advantage:
No seat assignments
Low Cost
No baggage transfers
High
Frequent,
No meals (peanuts)

2011 Pearson Education, Inc. publishing as Prentice Hall

Standardized
Fleet of Boeing
737 Aircraft

Figure 2.8
2 - 39

Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service

No meals (peanuts)
Lean,
Short Haul, Point-toLower gate costs at
Productive
Point Routes, Often to
secondary
airports
Employees
Secondary Airports
High number of flights
Competitive
reduces employee
idleAdvantage:
time
Low Cost
between flights
High
Aircraft
Utilization

2011 Pearson Education, Inc. publishing as Prentice Hall

Standardized
Fleet of Boeing
737 Aircraft

Frequent,
Reliable
Schedules
Figure 2.8
2 - 40

Activity Mapping at
Southwest Airlines
Courteous,
but
High number
of flights
Limited Passenger
reduces employee
idle time
Service
between flights
Lean,
Short Haul, Point-toSaturate a city with flights,
Productive
Point Routes, Often to
lowering
administrative
Employees
Secondary Airports
costs (advertising, HR, etc.)
Competitive
Advantage:
per passenger
for that
city
Low Cost
Pilot training required on
Highonly one type of aircraft
Frequent,
Aircraft
Reliable
Reduced maintenance
Utilization
Schedules
Standardized
inventory required
because
Fleet of Boeing
of only one type
ofAircraft
aircraft
737
Figure 2.8

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Activity Mapping at
Southwest Airlines
Pilot training required on
Courteous,
but
onlyLimited
one
type
of
aircraft
Passenger
Service
Reduced
maintenance
inventory required because
Lean,
Short Haul, Point-toof
only
one
type
of
aircraft
Productive
Point Routes, Often to
Employees Excellent supplier relations
Secondary Airports
with Boeing
has aided
Competitive
Advantage:
financing
Low
Cost
High
Aircraft
Utilization

2011 Pearson Education, Inc. publishing as Prentice Hall

Standardized
Fleet of Boeing
737 Aircraft

Frequent,
Reliable
Schedules
Figure 2.8
2 - 42

Activity Mapping at
Southwest Airlines
Courteous, but
Limited
Passenger
Reduced
maintenance
Service

inventory required because

of only one type of aircraft
Lean,
Short Haul, Point-toProductive
Point
Routes, Often to
Flexible
employees
and
Flexible
union
Employees
Secondary Airports
standard
planes
aid
contracts
scheduling
Competitive Advantage:
Low Cost
Maintenance
personnel
trained only one type of
High
Frequent,
aircraft
Aircraft
Reliable
Utilization
Schedules
Standardized
20-minute
gate turnarounds
Fleet of Boeing
737 Aircraft

2011 Pearson Education, Inc. publishing as Prentice Hall

Figure 2.8
2 - 43

Activity Mapping at
Southwest Airlines

Lean,
Productive
Employees

High
Aircraft
Utilization

Automated ticketing
Courteous,
but
machines
Limited Passenger
Service
Empowered
employees
High employee
Short Haul, Point-tocompensation
Point Routes, Often to
Secondary Airports
Hire for attitude, then train
Competitive
Advantage:
High
level of stock
Low Cost
ownership
High number of flightsFrequent,
Reliable
reduces employee idle time
Standardized
between flights Schedules
Fleet of Boeing
737 Aircraft

2011 Pearson Education, Inc. publishing as Prentice Hall

Figure 2.8
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Four International
Operations Strategies
International
Strategy

Cost Reduction Considerations

High

Figure 2.9

Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low

High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)

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Four International
Operations Strategies
Cost Reduction Considerations

High

Figure 2.9

International Strategy
Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson

Low
Low

High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)

2011 Pearson Education, Inc. publishing as Prentice Hall

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Four International
Operations Global
Strategies
High

Cost Reduction Considerations

Strategy

Figure 2.9

Standardized
product
Economies of scale
Cross-cultural
learning
International Strategy
Import/export or
Examples
license existing
product
Texas Instruments
Examples
U.S.Caterpillar
Steel
Harley Davidson
Otis Elevator

Low
Low

High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)

2011 Pearson Education, Inc. publishing as Prentice Hall

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Four International
Operations Strategies
High

Figure 2.9

Cost Reduction Considerations

Global Strategy
Standardized product
Economies of scale
Cross-cultural learning
Examples:
Texas Instruments
Caterpillar
Otis Elevator

International Strategy
Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson

Low
Low

High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)

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Four International
Multidomestic
Operations
Strategies
Strategy
High

Figure 2.9

Cost Reduction Considerations

Global Strategy

Use existing
Standardized product
Economies of scale
domestic
model
Cross-cultural
learning
Examples:globally
Texas Instruments
Caterpillar
Franchise, joint
Otis Elevator
ventures,
subsidiaries
International Strategy
Import/export or
license existing
product

Low
Low

Examples
Heinz
Examples
U.S. Steel
McDonalds
Harley
Davidson
The Body Shop
Hard Rock Cafe

High

Local Responsiveness Considerations

(Quick Response and/or Differentiation)
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Four International
Operations Strategies
High

Figure 2.9

Cost Reduction Considerations

Global Strategy
Standardized product
Economies of scale
Cross-cultural learning
Examples:
Texas Instruments
Caterpillar
Otis Elevator

Import/export or
license existing
product

Multidomestic Strategy
Use existing
domestic model globally
Franchise, joint ventures,
subsidiaries

Examples
U.S. Steel
Harley Davidson

Examples
Heinz The Body Shop
McDonalds Hard Rock Cafe

International Strategy

Low
Low

High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)

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Four International
Operations
Strategies
Transnational
High

Strategy

Figure 2.9

Cost Reduction Considerations

Global Strategy

Move material,
people, ideas
Examples:
Texas Instruments
across national
Caterpillar
Otis Elevator
boundaries
Economies of scale
Multidomestic Strategy
International Strategy
Use existing
Cross-cultural
domestic model globally
Import/export or
Franchise, joint ventures,
license
existing
learning
subsidiaries
product
Standardized product
Economies of scale
Cross-cultural learning

Examples
Coca-Cola
Nestl
Examples
U.S. Steel
Harley Davidson

Low
Low

Examples
Heinz The Body Shop
McDonalds Hard Rock Cafe

High

Local Responsiveness Considerations

(Quick Response and/or Differentiation)
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Four International
Operations Strategies
High

Cost Reduction Considerations

Global Strategy
Standardized product
Economies of scale
Cross-cultural learning
Examples:
Texas Instruments
Caterpillar
Otis Elevator

Transnational Strategy
Move material, people, ideas
across national boundaries
Economies of scale
Cross-cultural learning
Examples
Coca-Cola
Nestl

Import/export or
license existing
product

Multidomestic Strategy
Use existing
domestic model globally
Franchise, joint ventures,
subsidiaries

Examples
U.S. Steel
Harley Davidson

Examples
Heinz The Body Shop
McDonalds Hard Rock Cafe

International Strategy

Figure 2.9

Low
Low

High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)

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Summary
Need for operations strategy
Areas of operations strategy
Competitiveness focus of Operations strategy
Outcome of the case discussions

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