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Operations strategy


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Management Systems

Published in: Business
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Operations strategy

  2. 2. AGENDA – Competitive Priorities of Companies – Operations Performance Objectives – Trade-offs and Performance Frontiers – How is an Operations Strategy developed?
  3. 3. Lets have a discussion • What is the difference between Operations and Operational? • What is the main objective of strategy development? • Where do capabilities get created? • How is Operations related to Strategy?
  4. 4. Strategies for Competitive Advantage  Differentiation – better, or at least different  Cost leadership – cheaper  Response – rapid response
  5. 5. Operations Performance Objectives • Quality • Speed • Dependability • Flexibility • Cost Efficiency
  6. 6. Meaning of quality for different organizations Hospital Automobile Plant • Patients receive appropriate treatment • Treatments are carried out in correct manner • Patients are kept informed • Staff are courteous and helpful • All parts/assemblies made to specification • Product is reliable • Product is attractive and without blemishes/dents Bus tour operator Super market ? ?
  7. 7. Meaning of speed for different organizations Hospital Automobile Plant • Time between requiring treatment and receiving treatment kept to minimum • Time for test results to be returned kept at minimum • Time from surgery to discharge kept at minimum ? • Time taken for a customer to complete the transactions and billing kept to a minimum • On-time availability of goods Bus tour operator Super market ?
  8. 8. Meaning of dependability for different organizations Hospital Automobile Plant • On-time delivery of vehicles to dealers • On-time delivery of spares to service centres Bus tour operator Following published timetable at all times Ensuring availability of seats to all booked passengers Super market ? ?
  9. 9. Meaning of flexibility for different organizations Hospital Automobile Plant • Mix- wide range of products/options • Volume- ability to adjust production volumes • Delivery- ability to reschedule manufacturing priorities Bus tour operator Mix- large number of locations served Volume- ability to adjust frequency of services Delivery- ability to reschedule trips as needed Super market ? ?
  10. 10. Meaning of cost efficiency for different organizations Hospital Automobile Plant • Technology and facility costs • Staff costs • Purchased materials and services costs Bus tour operator Super market ? Proportion of the above costs vary by industry
  11. 11. Internal and external benefits of excelling at each performance objective Potential internal benefits Performance objective Potential external benefits Quality Speed Dependability Flexibility Cost
  12. 12. Internal and external benefits of excelling at each performance objective Potential internal benefits Performance objective Potential external benefits • Error free processes • More internal reliability • Lower processing costs Quality • Error free products and services • Reliable products and services • Faster throughput times • Less inventory • Lower processing costs Speed • Short delivery times • Fast response to requests • Fewer contingencies needed • More internal stability • Lower processing costs Dependability • On-time delivery of products and services • Knowledge of delivery times • Better response to unpredicted events Flexibility • Frequent launch of new products and services • Wide range of products and services • Easier Volume adjustments • Easier delivery adjustments • Productive processes • Higher margins Cost • Low prices
  13. 13. Which Dimensions Should Be the Focus? Order winners: Criteria that differentiates one firm from another. Examples: low cost (RyanAir), service quality (Narayana Hrudayalaya hospital, India), Flexibility (Dell) Order qualifier: Criterion that permits the firm’s products/services to even be considered for purchase. Example: basic quality necessary to be considered a good car
  14. 14. Order Winners and Qualifiers • Order winners – Performance objectives which directly and significantly contribute to winning businesses from customers – Considered by customers as key reasons for purchasing a product or service • Qualifiers – Important but are not major competitive determinants – Must be at some “threshold” level to be considered by the customer – Further improvement beyond “threshold level” unlikely to result in competitive benefit What are the order winners and order qualifiers for a AAU Masters student which a recruiter looks for?
  15. 15. All the performance objectives are important… why not try to excel along every one?
  16. 16. Competitive Dimensions and Trade-offs Trade-offs Trade-offs: Decisions that arise because of the inability of processes to excel simultaneously across all competitive dimensions.
  17. 17. Birth of Operations strategy • • Skinner (1969) outlined the process of linking corporate strategy to manufacturing strategy • Maximizing operational effectiveness requires recognizing the trade-offs in designing and operating a production system The notion of a focused factory • Based on a study of 50 plants across 6 industries (Skinner, 1974) • A factory cannot perform well on every yardstick • A factory serving different markets with different competitive strategies should be organized as separate plants within a plant -‘focused’ factories, one for standardized products and the other for customized products
  18. 18. Focus • Performance Objective Focus • Product/service specification focus • Geographic focus • Variety focus • Volume focus • Process requirement focus
  19. 19. How are these images related to trade-offs and performance frontiers? Remember, all companies or all business units of a company do not face these trade-offs Hence, it is actually possible for some companies/ some individuals to improve on multiple dimensions simultaneously
  20. 20. Capabilities get built over a period of time Cost Flexibility Delivery • Sand cone model of capability accumulation: Empirical evidence suggests that competitive capabilities accumulate in an orderly fashion from quality to delivery to flexibility to cost 20 Quality Integrating trade-off and sand cone models • Performance frontier: Maximum performance that can be achieved given a set of operating choices •Where an organization is positioned relative to their performance frontiers determines whether the trade-off model or sand cone model holds •Trade-offs among capabilities are likely to occur when companies are operating near their performance frontier
  21. 21. Reaching the performance frontier is similar to reaching the end of an innovation cycle Innovation cycle 2 L Cost Performance frontiers L L = Low, H = High 21 Innovation cycles Innovation cycle 1 Responsiveness Quality Delivery Quality Delivery Flexibility Cost Flexibility Cost H H Theory of Competitive Progression
  22. 22. Group Exercise 2.1 • Identify performance measures for quality, speed, dependability, flexibility and cost for the companies you have been working on, indicate their relative importance and decide which are the order winners and qualifiers with justifications
  23. 23. Operations strategy is ….. “… 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 Market Requirements operations resources …” Strategic Reconciliation OPERATIONS STRATEGY Operations strategy reconciles the requirements of the market with the capabilities of operations resources
  24. 24. Tactical Operations Operations strategy Micro level of the process Macro level of the total operation Time scale Level of analysis Short-term for example, capacity decisions 1-12 months Demand 1-10 years Demand Long-term for example, capacity decisions Level of aggregation Detailed For example “What operational capabilities do we need to cater to the rural market in India?” Aggregated For example “What is our overall capabilities in emerging markets with respect to competitors?” Level of abstraction Concrete For example “How do we improve our purchasing procedures?” Abstract For example “Should we develop strategic alliances with suppliers?”
  25. 25. Corporate strategy Business strategy Operations strategy Emergent sense of what the strategy should be Operational experience Top-down and bottom-up perspectives of strategy
  26. 26. Preconditions for developing Operations Strategy One must understand:  Strengths and weaknesses of competitors and possible new entrants into the market  Current and prospective environmental, technological, legal, and economic issues  The product life cycle  Resources available within the firm
  27. 27. Developing an Operations Strategy 1. Segment the market according to the product group. Example: need based segmentation 2. Identify (a) product requirements, (b) demand patterns, Example: seasonal, low demand 3. Determine the order winners and order qualifiers. Example: delivery speed (winner), cost (qualifier) 4. Convert order winners into specific performance requirements. Example: Must sell at or below 1000 DKK
  28. 28. Developing an Operations Strategy The next step is to analyze at the process level… 1. Define the complexity and volume of your product/service. 2. Define whether you offer few specific products/services or highly customized products/services. 3. Finalize product design, process design, supply chain design, supplier relations, capacity management plan & technology choice
  29. 29. Operations’ Role in Corporate Strategy • Operations provides support for a differentiated strategy • Operations serves as a firm’s distinctive competence in executing strategies better than competitors
  30. 30. Performance Objectives Customer Needs Market Positioning Competitors’ Actions Required performance Understanding markets The market perspective on operations strategy
  31. 31. PERFORMANCE OBJECTIVES •Wide variety •Product mix flexibility •Speed to market CUSTOMERS Segmentation on: •Age - youth •Purpose - general •Customer needs MARKET POSITION Differentiation on: •Innovative designs •Time to market •Product range •Coordinated launches COMPETITORS Traditionally weak in: •promotion •design innovation •responsiveness The market perspective analysis of a garment company
  32. 32. Operations Strategy Decision Areas Tangible and Intangible Resources Operations Capabilities Operations Processes The operations resource perspective on operations strategy Understanding resources and processes Strategic decisions
  33. 33. Resources Tangible •Equipment •Staff Intangible •Reputation •Relationships (internal and external) •Experience Capabilities •Application of leading-edge lighting technology • Articulation of client requirements •Service and installation Processes • Integration of equipment supply and client requirements •Design process •Supplier liaison process Operations Strategy Decisions •Location •Virtual reality technology •Supplier development •Equipment tracking system •Organizational structure The operations resource perspective analysis of a theatre lighting company
  34. 34. Performance Objectives Customer Needs Operations strategy is the strategic reconciliation of market requirements with operations resources Market Positioning Competitors’ Actions Required performance Understanding markets Operations Strategy Decision Areas Tangible and Intangible Resources Operations Capabilities Operations Processes Understanding resources and processes Strategic decisions
  35. 35. Operations has to cope with the clash between the nature of external markets and the nature of internal resources Operations Resources are…. Difficult to change Technically constrained Complex Market Requirements are…. Dynamic Heterogeneous Ambiguous
  36. 36. Operations Strategy Decision Areas • Capacity Strategy • Supply Network Strategy • Process Technology Strategy • Development and Organization
  37. 37. Operations Strategy Matrix Source: Operations Strategy by Slack and Lewis, 3rd edition
  38. 38. Discussion on Seven-Eleven Japan
  39. 39. Group Exercise 2.2 • Conduct market requirements and operations resources analysis for the companies you have worked on in session 1
  40. 40. Evolution of Positioning Strategies • The characteristics of production systems tend to evolve as products move through their product life cycles. • Operations strategies must include plan for modifying production systems to a changing set of competitive priorities as products mature. • The capital and production technology required to support these changes must be provided.
  41. 41. Product Life Cycle Introduction Growth Maturity Decline Product design and development critical Product and process design Short production runs High production costs Limited models Attention to quality OM Strategy/Issues Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Enhance distribution Standardization Less rapid product changes – more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity