Advances in technology have greatly increased operational ...
Operations & Competition
DEFINITIONS OF OPERATIONS STRATEGY
An operations strategy is a set of goals, policies, and self-
imposed restrictions that together describe how the
organization proposes to direct and develop all the
resources invested in operations so as to best fulfill its
Other definitions of operations strategy:
An operations strategy consists of a pattern of decisions
that, over time, enables a business unit to achieve a
desired operations structure, infrastructure, and set of
specific capabilities in support of competitive priorities.
An operations strategy is a set of policies in both process
choice and infrastructure design which are consistent
with the existing ways that products win orders, while
being able to reflect future developments in line with
changing business needs.
The successful implementation of an operations
strategy creates value for the customer.
LEVELS OF STRATEGY
What business are we
Divisional How do we compete?
Fin HR Mkt Dev Ops
Role of each function?
COMPONENTS OF THE DEFINITION
Structural decision Capacity
Infrastructural decision Workforce
Capabilities: Unique to each firm
Competitive priorities: Cost
KEY OPERATIONS PRINCIPLES
Aggregation Principle: The higher the level of aggregation,
the more predictable operations becomes (e.g. forecasts of
total product volume tend to be more accurate than
forecasts of individual products). This is a manifestation
of the Central Limit Theorem.
Uncertainty Principle: The more uncertainty in operations,
the greater the need to employ extra resources to cope with
this uncertainty. Alternatively, the greater the stability and
predictability, the more efficiently operations can function.
Efficiency Principle: All else being equal, operations
should function as efficiently as possible.
Quality consists of many dimensions that can be aggregated into:
relative quality (level of attributes) and functional quality (the ability
to operate as intended).
Category Dimension Definition
Relative Performance A product's or service's primary operating
Features The "bells and whistles" of products and
services, those characteristics that
supplement their basic functioning
Aesthetics How a product looks, feels, sounds, tastes, or
For services – physical facilities, equipment,
and appearance of personnel
Perceived Inferences about quality based on indirect
quality tangible and intangible aspects of the product
or service (e.g. reputation)
Functional Reliability The probability of a product malfunctioning
quality or failing within a specified time period
For services – ability to perform the
promised service dependably and accurately
Conformance The degree to which product or service
design and operating characteristics meet
Durability The amount of use one gets from a product
or service before it deteriorates
Service The speed, courtesy, and competence of
For products – also, the ease of repair
Improvements in functional quality result from a reduction in process
Two delivery dimensions:
Lead time – The time the customer must wait between
order placement and receipt
Reliability – How reliable the company is in delivering a
customer's order on or before the quoted delivery date
Both lead time and reliability can be improved by reducing
uncertainty in the operations system.
Primary flexibility dimensions:
Product flexibility – The ability to produce a wide
variety of products or services and the ease with
which the product or service mix can be changed
Volume flexibility – The ability of the production
system to operate at different volumes and the ease
with which the volume can be changed.
Increased flexibility is a means to deal with demand
Advances in technology have greatly increased operational
Definition: In operations, innovation as a competitive
priority involves the ability to quickly
introduce and improve process technologies,
which increases speed to market with often
better products and services.
Main types of operations innovations:
Incremental – Minor improvements or simple
adjustments in existing technology. Rapid
accumulation of these innovations can convey a
Radical – Fundamental changes that represent
revolutionary changes in technology. They represent
clear departures from existing practice (i.e.,
substantially new processes and process technologies)
Innovation is often the primary competitive priority in a
high-velocity environment with short product life cycles.
OPERATIONS STRATEGY FORMULATION
The operations mission specifies what operations must
accomplish for the business to succeed. It states the purpose of
the operations function and competitive priorities as they relate
to the customer and competition.
Operations objectives should be defined in concise, measurable
terms, as part of the operations strategy. They should be
specific statements of expected results – a refinement of the
Structural and infrastructural decisions are stated in strategic
terms. They must be formulated to support the operations
mission and objectives and should be consistent with each
other and with what is intended to be accomplished by
Structural and infrastructural decisions are stated in tactical
terms in support of the operational strategies.
The competitive priorities provide a framework for developing
a distinctive competence, which is realized through the
implementation of the operations strategy and the use of the
firm’s resources. It is what sets operations apart from the
competition and, thus, can be defined in terms of uniqueness.
A MARKETING-ORIENTED VIEW OF
Development of an operations strategy:
1. Define corporate objectives.
2. Determine marketing strategies to meet these
3. Assess how different products or services qualify in
their respective markets and win orders against
4. Establish the most appropriate process to produce or
deliver these products or services (process
5. Provide the operations infrastructure to support
production and delivery.
Steps 4 and 5 constitute the operations strategy.
ORDER-WINNERS AND QUALIFIERS
Order-qualifiers are those criteria that a company must
meet for a customer to even consider it as a possible
supplier. Companies need only be as good as competitors.
Order-winners are those criteria that win the order.
Companies need to be better than their competitors.
From an operations perspective, determining order-winners
and order qualifiers helps to define competitive priorities.
This view of operations strategy is especially time- and
IMPORTANT CONSIDERATIONS IN OPERATIONS
Operations are part of a system that includes the other
functional areas, the business, and the corporation.
As such, the strategies must be linked, integrated, and
The operations strategy process is iterative, both within a
planning cycle and between cycles.
Between planning cycles, the operations strategy process
should reflect the changing environment.
While strategic planning precedes implementation, a plan
that is not implemented is not a strategy and is often worse
for the organization than no stated plan at all.
McDonald’s Operations Mission
McDonald’s Operational Strategies
Capacity • Growth as needed through additional stores -
but capacity added carefully
• Well-utilized - franchisee's well-being
depends on it being heavily utilized
Facilities • Distributed facilities, each facility being very
similar to the next, all focused around a
similar menu with some local variations
(especially by country)
Process • High degree of process understanding,
Technology emphasis on "fool-proof" processes
• A leader in the technology of fast-food
Vertical • Partnership arrangement
Integration • Long-term relationship with suppliers to
promote innovation and quality improvement
Workforce • Franchisees: well-trained, carefully selected,
• Operators: high-turnover, lower-paid
Organization • Guidelines provided by corporation, but
franchisees push to locally optimize
Control • Centralized buying
Systems • Bulk contracts
• "Push" system for basic supplies, "pull"
system day-to-day in the restaurants
CRITERIA FOR EVALUATING
AN OPERATIONS STRATEGY
Consistency (internal and external)
Between the operations strategy and the overall business
Among the decision categories that make up the
Between the operations strategy and the other functions’
Between the operations strategy and the business
environment (resources available, competitive behavior,
governmental restraints, etc.)
Contribution (to competitive advantage)
Making trade-offs explicit, enabling operations to set
priorities that enhance the competitive advantage
Directing attention to opportunities that complement the
Promoting clarity regarding the operations strategy
throughout the firm
Providing the operational capabilities that will be
required by the business now and in the future
EVOLUTION OF OPERATIONS STRATEGY
Stage Operation's strategic role
1 Internally neutral - Minimize operation's negative
2 Externally neutral - Achieve parity with
3 Internally supportive - Provide credible support to
4 Externally supportive - Pursue an operations-
based competitive advantage
STAGES OF OPERATIONS STRATEGY
Stages 1 and 2
Stage 1 Internally neutral
Operations not involved in strategy
Keep operations under control - detailed
Fight fires, eliminate problems
Operations is kept flexible and unfocused
Short-term performance is emphasized
Top management is not involved in operations
Stage 2 Externally neutral
Industry practice is followed
Capital investment to maintain or gain position
Keep up with competition in operations
Planning horizon is one business cycle
Use industry-wide wage rates
STAGES OF OPERATIONS STRATEGY
Stages 3 and 4
Stage 3 Internally supportive
An operations strategy is formulated and pursued
Keep operations in step with business strategy
Operations investments are screened for
consistency with business strategy
Longer-term trends are addressed systematically
Consistency within operations
Translate business strategy into operations terms
Stage 4 Externally supportive
Anticipate new operations practices and
Operations is an equal partner in business
Operations is involved up front in market
Operations contributes to other functions
Structure and infrastructure are concerns to top
Teamwork and involved workforce
Operations is innovative
Competitive strategy rests on operations
Functions of the firm are well integrated
ATTACKING AND DEFENDING
Positioning – Appealing to a different customer need
Capabilities – being better at the same game
Systems (coordination)-based capabilities
Exploiting its own strengths
Attacking its attacker’s operations-based weaknesses
Recognizing the seriousness of the attack quickly and
emulating the attacker’s strategy
Characteristics and Implications for Operations
• The cost structure for most information-intensive products is
dominated by the “up-front” costs associated with
developing a new product and creating its associated
• Rapid changes in technology and markets.
• Network effects (i.e. the increasing attractiveness to users of
certain networks as they increase in size). Network effects
are a function of the number of users of a particular
technology and the system of complementary products
associated with the network.
• Quality and time have an interaction effect.
• Information technology enables direct, real-time
communication with users.
• Compatibility is as important as differentiation.
• Increased importance of project (vs. process) management.
• Cumulative output and speed to market are key for low-cost
• Installing a less-than-perfect but improvable system is
sometimes better than waiting to introduce a more refined
• High flexibility (customization) is at least an order qualifier.
• Operations must be able to introduce new products and
• Operations organized for collaboration and communication.
ISSUES IN SERVICE OPERATIONS
Simultaneous production and consumption
Inability to inventory the customer-facing portion of
services increases the importance of capacity and facilities
Services tend to be high on experience and credence
Much of the service delivery process is transparent to the
customer, therefore …
Evaluation of the service is based to a large extent on
the process and not just the outcome
Because both the provider and customer are involved in
service delivery process (i.e., co-production), effective
service delivery requires that service delivery “models” or
“scripts” are consistent between the customer and service
ISSUES IN SERVICE OPERATIONS
The interaction between the front-line employee and
customer is an important determinant of customer
satisfaction, therefore …
A high degree of customer contact requires that the
interface between the service provider and customer
be carefully managed.
Greater variability (both complexity and divergence) in
outcomes exists due to customer participation in service
delivery, therefore …
As the customer becomes more actively involved in
the service process, it becomes increasingly difficult
to deliver the service efficiently.
Even a service that can be characterized as “high customer
contact” overall, is usually a mix of high and low contact.
High and low contact segments of the service can be
decoupled for greater efficiency, but should not
always be decoupled.
CUSTOMER CONTACT MODEL
Potential facility efficiency α
Most services are a combination of high and low contact, and can
be designed for both customer satisfaction and efficiency by
following these steps:
1. Identify those points in the service system where decoupling
between high and low contact is possible and desirable.
• For “Cost Leader” type services, back-office activities are
decoupled from the front office for the purpose of lowering
• For “Personal Service” type services, back-office tasks are
retained in the front office to pursue non-cost-oriented
• For “Kiosk” type services, all tasks remain in the front-
office to save costs.
• For “Focused Professional” type services, front- and back-
office activities are decoupled to enable front-office workers
to provide higher service, rather than to reduce costs.
2. Employ contact reduction strategies where appropriate.
3. Employ contact enhancement strategies where appropriate.
4. Employ traditional efficiency improvement techniques (TQM,
BPR, etc.) to improve low contact operations, especially for
Cost Leader services.
Customers carry away an overall assessment of an
experience based on:
The trend in the sequence of pain or pleasure
The high and low points
People who are engaged in a task don’t notice how
long it takes
People will overestimate the time an activity takes
Increasing the number of segments in an encounter
lengthens its perceived duration
People want things to make sense. If there’s no handy
explanation for an unexpected event, they’ll concoct
IMPLICATIONS FOR SERVICE DESIGN
Get the bad experiences out of the way early.
Segment the pleasure, combine the pain.
Build commitment through choice.
Give people rituals, and stick to them.
The following types of work teams are found within operations:
Team Autonomy Continuum
Traditional Quality Semi- Self- Self-
work groups circles autonomous managing designing
work groups teams teams
Low Team Autonomy High Team Autonomy
Traditional work groups. Workers perform the core production
activities and have no management responsibility or control.
Quality circles. Workers participate in group problem
identification and solving meetings. Day-to-day operating
organization remains intact.
Semi-autonomous work groups. Workers manage and execute
major production activities, but not support activities.
Self-managing teams. Groups of individuals self-regulate on their
interdependent tasks, with the scope of tasks more comprehensive
than that of semi-autonomous work groups.
Self-designing teams. These groups have all the characteristics of
self-managing teams. In addition, they have control over the
design of the team itself and decide such issues as what tasks
should be done and who should belong to the team.
Issues to consider:
Participatory decision making approaches are not
necessarily best for all situations.
However, current operations environments are often
characterized by functional and process
interdependencies, requiring team, rather than
individual, approaches to decision making.
Work teams will be successful in the long-term if they
are organized as institutionalized forms of substantive
participation. Substantive participation is the ability of
teams to make and implement decisions.
Work teams and hierarchies are not mutually exclusive.
Each serves its own role.
Eight important factors to consider:
Capacity is technologically based.
Capacity depends on the interaction of multiple resource
Capacity is mix dependent.
Capacity can sometimes be stored.
Capacity depends on management policies.
Capacity is dynamic.
Capacity is location specific.
Capacity is affected by the degree of variability of
demand and processing time.
With demand and processing variability, lines may
form even with excess capacity.
As the average rate of arrivals approaches the average
processing rate, system performance deteriorates
rapidly and a capacity squeeze occurs.
Timing of Capacity Changes
Lead demand with capacity
Build to the forecast
Add capacity only after demand exceeds it
Mixed and/or nonstructural policies
Determining the appropriate capacity cushion:
Unit costs of excess/insufficient capacity
Sizing of Capacity Increments
Economies of scale:
Short-term – cost per unit output decreases as total output
increases (i.e., spreading the overhead costs)
Intermediate-term – increasing batch sizes (decreasing
changeovers); dedicating resources to specific products,
services, or tasks; using equipment that is specifically designed
for the needs of a given product or service
Static economies of scale – using one large facility or piece
of equipment instead of a number of smaller ones to create a
product or service
Dynamic economies of scale – improvements in the total
operating cost per unit that results from the skills, systems,
and experience that accumulates over time
Diseconomies of scale:
Distribution, bureaucratization, confusion, vulnerability
Increasing economies of scale:
OPTIMAL ECONOMIC SIZE
Approaches to Capacity Expansion
Don't build additional capacity until the need for it develops
Try to outguess the market by following a counter-cyclical
Build for the long haul
Follow the leader(s)
How can a capacity expansion strategy be used
DEVELOPING THE SUPPLY CHAIN
Insourcing vs. Outsourcing Considerations
• Increased control over • Capital costs
price, quality, etc. • Capability limits
• Economies of combined • Time limits
Insourcing operations • Opportunity costs
• Proprietary products • Reduced flexibility to
protected change partners
• Reduced volume flexibility
• Low capital costs • Unfavorable allocation of
• Specialization product
• Competition • Lack of control over price,
• Increased flexibility quality, etc.
• Lock-in from specialized
contracts and assets
• Transaction (coordination)
DEVELOPING THE SUPPLY CHAIN
The view that negotiations between buyer and seller is a zero-sum (i.e., win/lose)
game. Often used when a firm represents a significant share of the supplier’s sales or
many substitutes are available. Example: WalMart
The view that the buyer and seller are partners. Includes sole sourcing. Often used
with strategically important and/or high value-added components. Example:
Seeks to combine the advantages of the competitive orientation (e.g. low prices) with
the cooperative orientation (e.g. few suppliers). Example: Dell Computer
SUPPLY CHAIN MANAGEMENT
Managing Supply Chain Relationships
Long term relationships
Arm’s-length Non-strategic Strategic
Characteristics • Short-term contracts • Longer-term contracts • Long-term contracts
• Price sensitivity • Price sensitivity more broadly • Relation-specific
• Minimal interface defined investments
between firms • Minimal to moderate interface • Supplier performance more
• Contractual between firms broadly defined
safeguards are • Contractual safeguards are • Self-enforcing agreements
sufficient to enforce sufficient to enforce agreements are necessary for optimal
When to use • Product is necessary • Product is necessary but non- • Components help to
but non-strategic strategic differentiate the customer’s
• Commodity product • Dividing purchases across multiple product
• Purchases account for suppliers reduces the ability of • Customized, non-standard
a small percentage of suppliers to achieve significant products
supplier’s production economies of scale • Multiple interaction effects
• Switching costs are • Vigorous competition can be with other inputs
low achieved with few suppliers • High degree of supplier/
• Low value-added • Switching costs are relatively high buyer interdependence
• Low value-added • High value inputs
STRATEGIC MANAGEMENT OF THE SUPPLY CHAIN
Efficient Supply Chains:
The purpose of efficient supply chains is to coordinate the flow of materials and services so as to
minimize inventories and maximize the efficiency of the manufacturers and service providers in
the chain. Efficient supply chains work best when demand is predictable and products/services
are stable. Example of competitive priority: low cost.
Responsive Supply Chains:
The purpose of responsive supply chains is to react quickly to market demands by positioning
inventories and capacities in order to hedge against uncertainties in demand. Responsive supply
chains work best when demand is unpredictable, new product introduction is frequent, and
product variety is high. Examples of competitive priorities: development speed, fast delivery,
customization, volume flexibility, high-performance design quality.
Innovations in information technology and other practices are facilitating the integration of the
supply chain for greater efficiency and responsiveness and enabling “orchestrated” networks.
GLOBAL OUTSOURCING AND OFFSHORING
Strategic control and risks
DESIGNING THE MULTIFACILITY NETWORK
By product line
By production volumes
By process stage
By geographic region
Layout – some key issues are efficiency, communication,
MANAGING THE MULTIFACILITY NETWORK
Choosing and managing a network type
Degree of (de)centralization
Centralized networks are more appropriate when different
Produce similar products
Serve similar customers who value uniformity
Operate in similar environments with similar constraints
and/or resources, especially in the presence of significant
Decentralized networks are more appropriate when facilities:
Produce different products
Serve customers with different needs
Operate in very different local environments
SUPPLY CHAIN DYNAMICS
The bullwhip effect – in which fluctuations in inventory and
order levels tend to increase as one moves back up the channel
from the final customer
Some causes of the bullwhip effect include lack of visibility/
communication throughout the supply chain, delays in
information flows, ordering and shipping lags.
The bullwhip effect can be alleviated by:
Reducing the number of stages in the supply chain
Communicating consumer demand directly up the supply
Reducing ordering and shipping delays
Reducing demand destabilizing practices
Counter consumer “gaming” during shortages
Strategic implications of superior process technology
Accelerated time to market
Enhanced customer acceptance
Stronger proprietary position
Key process development decisions:
Approaches to integrating process and product development
(e.g. design for manufacturability, prototyping)
Timing of technology transfer to operations
Locus of process development problem solving and learning
by doing vs. learning before doing
Degree of local autonomy for developing and changing
INCREMENTAL IMPROVEMENT, REENGINEERING, AND PRODUCTIVITY
The purpose of incremental process improvement and reengineering is to move operations toward
the performance frontier by: 1) eliminating non-value added activities and steps in the process and/
or, 2) moving to a new performance frontier.
Non-value added activities or steps can be characterized as waste (i.e., no potential to add value) or
slack (i.e., resources in excess of what are required to get the job done, including buffers). The
concept of “value added” can be thought of in the context of whether a customer would be willing
to pay for that activity or step to be performed and/or whether a product or service’s value can be
increased through that activity.
Incremental process improvement involves eliminating non-value added activities or steps while
leaving the current process essentially intact.
Reengineering involves a fundamental rethinking and radical redesign of processes to improve
performance dramatically in terms of cost, quality, service, and speed.
Elimination of non-value added activities or steps increases productivity, by definition.
SOURCES OF NON-VALUE ADDED ACTIVITIES
Why do non-value added activities or steps occur in processes?
Poor process and/or organizational design (dysfunctional
Barriers to learning
From outside the organization
To find and correct errors elsewhere in the process
Unclear understanding of “value” and “risks”
PROCESS IMPROVEMENT PROCEDURE
Discover where non-value added activities are in the process and
prioritize improvement efforts
Flow charts (value stream mapping)
Take action based on the source of the non-value added activity
Remove barriers to learning
Reducing dysfunctional uncertainty
Implementing a systematic approach to process
Increasing process knowledge
Reengineering projects often take more of a “clean-slate”
approach than incremental process improvement and are typically
higher risk and higher return.
A lean system is one which minimizes the cost of buffering (i.e., “best buffer”).
Reduce the need for buffers (uncertainty Reduce excess buffers (efficiency
• Address dysfunctional uncertainty (e.g. • More efficient responses to strategic
poor quality, poor planning processes) uncertainty (e.g. cross-training, mass
• Lower-buffer practices in stable and
predictable environments (e.g. JIT)
If buffers are needed, it is often possible to “swap” buffers (inventory, capacity, time) to
minimize the disruption to the process/customer and provide the slack to address and
Customization (Product Variety) with
Standardized Operations (Mass Customization)
Since customization (product variety) creates uncertainty in
operations, and uncertainty requires extra resources,
customization is inherently less efficient than
However, it is sometimes possible to increase operational
efficiency even with customization using standardization
strategies (i.e., mass customization). Standardization
• Part standardization – Maximize component
commonality across products
• Process standardization – Delay customization as late as
• Product standardization – Carry a limited number of
products in inventory
CREATING AN IMPROVEMENT STRATEGY
What are the pros and cons of the following improvement
Tightly focused, top management-driven improvement
Single performance measure, dominant quadrant
Single performance measure, multiple quadrants
Broadly based, diffused improvement programs
Top management directed, staged improvement programs