Mba om 03_operation_strategyandcompetitiveness

Operations Management
Author: Prof. Niranjana K.R.
B.E. (Mech), PGDM, SSBB, LA ISO9001 & AS9100, Member – PMI & QCFI
Email: niranjanakoodavalli@gmail.com

Agreements
24-08-2016 2Author: Niranjana K.R.

References
1. Operations Management For Competitive Advantage – 11th
edition – Richard B. Chase, F. Robert Jacobs, Nicholas J.
Aquilano
2. Operations Management – An Integrated Approach, by R. Dan
Reid, Nada R. Sanders, 5th Edition, Wiley ,2012.
24-08-2016 3Author: Niranjana K.R.

Operations Management
Operations strategy and Competitiveness
Author: Prof. Niranjana K.R.
B.E. (Mech), PGDM, SSBB, LA ISO9001 & AS9100, Member – PMI & QCFI
Email: niranjanakoodavalli@gmail.com

LearningObjectives
After studying this chapter you should be able to
1. Define the role of business strategy.
2. Explain how a business strategy is developed.
3. Explain the role of operations strategy in the organization.
4. Explain the relationship between business strategy and
operations strategy.
5. Describe how an operations strategy is developed.
6. Identify competitive priorities of the operations function.
7. Explain the strategic role of technology.
8. Define productivity and identify productivity measures.
9. Compute productivity measures.
24-08-2016 Author: Niranjana K.R. 5

Definitions
• In a game, the strategy is a “game plan” designed so
that the team can win.
• Business strategy A long-range plan for a business.
• Operations strategy A long-range plan for the
operations function that specifies the design and use
of resources to support the business strategy.

7
The Role of Operations Strategy
• Provide a plan that makes best use of resources
which;
– Specifies the policies and plans for using
organizational resources
– Supports Business Strategy as shown on next slide
24-08-2016 Author: Niranjana K.R.

Business/Functional Strategy

9
Importance of Operations Strategy
• Companies often do not understand the differences
between operational efficiency and strategy.
– Operational efficiency is performing tasks well, even better
than competitors
– Strategy is a plan for competing in the marketplace
• Operations strategy is to ensure all tasks performed
are the right tasks.

10
Developing a Business Strategy
• A business strategy is developed after taking into
many factors and following some strategic decisions
such as;
– What business is the company in (Mission)
– Analyzing and understanding the market (Environmental
scanning)
– Identifying the companies strengths (Core Competencies)

11
Three Inputs to a Business Strategy

Mission
• A statement defining what business an organization is in, who
its customers are, and how its core beliefs shape its business.
• 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 customer
attributes (“homeowners,” “college graduates”)?
– How will the company’s basic beliefs define the business (“gives the
highest customer service,” “stresses family values”)?
• The mission defines the company.

Environmental Scanning
• What Does Environmental Scanning Tell Us?
– Environmental scanning allows a company to identify opportunities and threats.
(SWOT)
– Gap assessment against competitors, customer needs.
• What Are Trends in the Environment?
– The external business environment is always changing.
– Ex: Business processes, Change in technology
• Environmental scanning looks at economic, political, and social trends that
can affect the business.
– Economic trends include recession, inflation, interest rates, and general economic
conditions.
• Political trends include changes in the political climate—local, national,
and international—that could affect a company.
• Social trends are changes in society that can have an impact on a business.
– Ex: Awareness of the dangers of smoking, which has made smoking less socially
acceptable.

Core Competencies
• Core Competencies are the unique strengths of a business.
• In order to formulate a long-term plan, the company’s
managers must know the competencies of their organization.

15
Developing an Operations Strategy
• Operations Strategy is a plan for the design and
management of operations functions
• Operation Strategy developed after the business
strategy
• Operations Strategy focuses on specific capabilities
which give it a competitive edge – competitive
priorities

16
Operations Strategy – Designing the
Operations Function

17
Competitive Priorities- The Edge
• Competitive priorities - Capabilities that the
operations function can develop in order to give a
company a competitive advantage in its market.
• Four Important Operations Questions: Will you
compete on –
– Cost?
– Quality?
– Time?
– Flexibility?
• All of the above? Some? Tradeoffs?

18
Competing on Cost?
• Offering product at a low price relative to competition
– Typically high volume products
– Often limit product range & offer little customization
– May invest in automation to reduce unit costs
– Can use lower skill labor
– Probably use product focused layouts
– Low cost does not mean low quality

19
Competing on Quality?
• Quality is often subjective
• Quality is defined differently depending on who is defining it
• Two major quality dimensions include
– High performance design:
• Superior features, high durability, & excellent customer service
– Product & service consistency:
• Meets design specifications
• Close tolerances
• Error free delivery
• Quality needs to address
– Product design quality – product/service meets requirements
– Process quality – error free products

20
Competing on Time?
• Time/speed one of most important competition priorities
• First that can deliver often wins the race
• Time related issues involve
– Rapid delivery:
• Focused on shorter time between order placement and delivery
– On-time delivery:
• Deliver product exactly when needed every time

Competing on Flexibility?
• Company environment changes rapidly
• Company must accommodate change by being flexible
– Product flexibility:
• Easily switch production from one item to another
• Easily customize product/service to meet specific requirements of a
customer
– Volume flexibility:
• Ability to ramp production up and down to match market demands

The Need for Trade-offs
• Decisions must emphasis priorities that support business
strategy.
• Decisions often required trade offs
• Decisions must focus on order qualifiers and order winners
– Which priorities are “Order Qualifiers”?
e.g. Must have excellent quality since everyone expects it
– Which priorities are “Order Winners”?
• Southwest Airlines competes on cost
• McDonald’s competes on consistency
• FedEx competes on speed
• Custom tailors compete on flexibility

23
Translating to Production Requirements
• Specific Operation requirements include two general
categories
1. Structure – Operations decisions related to the design of the
production process, such as facilities, technology, and flow of goods
and services through the facility.
2. Infrastructure – Operations decisions related to the planning and
control systems of the operation, such as organization of operations,
skills and pay of workers, and quality measures.

Author: Niranjana K.R. 24
Translating to Production Requirements
• Dell Computer example – structure & infrastructure
– They focus on customer service, cost, and speed
– ERP system developed to allow customers to order directly
from Dell
– Product design and assembly line allow a “make to order”
strategy – lowers costs, increases turns
– Suppliers ship components to a warehouse within 15
minutes of the assembly plant - VMI
– Dell set up a shipping arrangement with UPS
24-08-2016

Strategic Role of Technology
• Technology should support competitive priorities
• Three Applications: product technology, process technology,
and information technology
– Products - Teflon, CD’s, fiber optic cable
– Processes – flexible automation, CAD
– Information Technology – POS, EDI, ERP, B2B
NOTE: Discussed during last class.
24-08-2016

Technology for Competitive Advantage
• Technology is an important strategic decision
• Technology has positive and negative potentials
– Positive
• Improve processes
• Maintain up-to-date standards
• Obtain competitive advantage
– Negative
• Costly
• Promotes dependency
• Risks such as overstating benefits
• Technology should,
– Support competitive priorities
– Can require change to strategic plans
– Can require change to operations strategy

Measuring Productivity
• Productivity is a measure of how efficiently inputs are
converted to outputs:
– Productivity = output/input
• Total Productivity Measure:
– Total Productivity = (total output)/(total of all inputs)
• Partial Productivity Measure:
– Partial Productivity = (total output)/(single input)
• Multifactor Productivity Measure:
– Multi-factor Productivity = (total output)/(several inputs)

Total Productivity: Example
• Bluegill Furniture makes kitchen chairs. The weekly dollar
value of its output, including finished goods and work-in-
progress, is $14,280. The value of inputs (labor, materials,
capital) is approximately $16,528. What is the total
productivity measure for Bluegill?
• Total productivity = output/input
• = $14,280/$16,528 = .864 or 86.4%

Partial Productivity: Example
• Bluegill Furniture has hired 2 new workers to paint chairs.
Together they have painted 10 chairs in 4 hours. What is labor
productivity for the pair?
• Labor productivity = output/labor
• = (10 chairs)/(2 x 4 hr) = (10 chairs)/(8 hr) or 1.25 chairs/hr

Multifactor Productivity: Example
• Bluegill Furniture averages 35 chairs/day. Labor costs average
$480, material costs are typically $200, and overhead cost is
$250. Bluegill sells the chairs to a retailer for $70/unit. Find
multifactor productivity.
• Multifactor productivity = (value of output)/(labor + material
+ overhead costs)
• = ($70/chair x 35 chairs)/(480+200+250) = ($2450)/($930) or
2.63

Productivity: Example

MU- June/July 2012 Exam question
• A Furniture manufacturing company has provided the
following data. Compare the Labour, Raw materials and
supplies and Total productivity of 2010 and 2011.
2010 2011
Output: Rs. 22,000 Rs. 35,000
Input:
Labour 10,000 15,000
Raw Materials and Supplies 8,000 12,500
Capital Equipment and depreciation 700 1,200
Others 2,200 4,800

Interpreting Productivity Measures
• Productivity measures must be compared to something, i.e.
another year, a different company
• Raw productivity calculations do not tell the complete story
unless there are no major structure differences.

Interpreting Productivity Measures
• Other productivity measure questions;
– Is this partial productivity measurement enough to make an investment decision?
– Should you also look at productivity measures for the two major competitors for
comparison?
• Productivity measure provides information on how the firm is doing
relative to what is critical to the firm
• To interpret the meaning of a productivity measure, it must be
compared with a similar productivity measure. For example,
– If one worker at a pizza shop produces 17 pizzas in two hours, the productivity of that
worker is 8.5 pizzas per hour. This number by itself does not tell us very much.
– When we compare it to the productivity of two other workers, one who produces 7.2
pizzas per hour and another 6.8 pizzas per hour, it is much more meaningful.
– We can see that the first worker is much more productive than the other two workers.

Compare Productivity (1 of 2)
• It is also helpful to measure and compare productivity over time.
– Let’s say that we want to measure the total productivity of our three pizza
makers (our “labour”) and we compute a labour productivity measure of 7.5
pizzas per hour. This number does not tell us much about the workers’
performance. However, if we compare weekly productivity measures over
time, perhaps over the last four weeks, we get much more information:
Now we see that the workers’ productivity is improving over time. Productivity changed
from 5.4 to 7.5 pizzas per labour-hour, resulting in an increase of 7.5/5.4 = 1.39, or an
increase of 39 percent.
Now, our main competitor, a pizzeria down the street, has a productivity of 9.5 pizzas per
labour-hour. This productivity rate is 26.7 percent (9.5/7.5 = 1.267) higher than our
productivity in week 4. What will you do?

Compare Productivity (2 of 2)
• Even though our productivity is going up, it should be higher.
• How do we address?
– By Analyzing our processes and increase our productivity.
– By comparing our productivity over time and against similar operations,
• Outcome: We have a much better sense of how high our productivity really
is.
• When evaluating productivity and setting standards for performance, we
also need to consider our strategy for competing in the marketplace—
namely, our competitive priorities.
• A company that competes based on speed would probably measure
productivity in units produced over time.
• A company that competes based on cost might measure productivity in
terms of costs of inputs such as labour, materials, and overhead.
• Conclusion: Productivity measure provides information on how we are
doing relative to the competitive priority that is most important to us.

Productivity and the Service Sector
• Measuring service sector productivity is a unique challenge
– Traditional measures focus on tangible outcomes
– Service industries primarily produce intangible outcomes
– Measuring intangibles is challenging
24-08-2016

Productivity: Example (Bank)

Productivity and Competitiveness
• Productivity is essentially a scorecard of how efficiently resources are used
and a measure of competitiveness.
• Productivity is measured on many levels and is of interest to a wide range
of people.
• Productivity can be measured for individuals, departments, or
organizations.
• It can track performance over time and help managers identify problems.
• Similarly, productivity can be measured for an entire industry and even a
country.
• The economic success of a nation and the quality of life of its citizens are
related to its competitiveness in the global marketplace.
• Increases in productivity are directly related to increases in a nation’s
standard of living.
• That is why business and government leaders continuously monitor the
productivity at the national level and by industry sectors.

Operations Strategy Across the Organization
• Business strategy defines long-term plan
• Operations strategy support the business strategy
• Marketing strategy needs to fully understand operations
capability
• Financial plans in effect support operations activities.
24-08-2016

Review of Learning Objectives
• Define the role of Business Strategy
• Explain how a Business strategy is developed
• Explain the role of Operations Strategy in the organization
• Explain the relationship between business strategy and
operations strategy
• Describe how an operations strategy is developed
• Identify competitive priorities for of the operations function
• Explain the strategic role of technology
• Define productivity and identify productivity measures
• Compute productivity measures
24-08-2016

Chapter Highlights
• Business Strategy is a long range plan and vision. Each individual business
function develop needs to support the business strategy
• An organization develops its business strategy by doing environmental
scanning and considering its mission and its core competencies.
• The role of operations strategy is to provide a long-range plan for the use of
the company’s resources in producing the company’s primary goods and
services.
• The role of business strategy is to serve as an overall guide for the
development of the organization’s operations strategy.
• The operations strategy focuses on developing specific capabilities called
competitive priorities.
• There are four categories of competitive priorities: cost, quality, time, and
flexibility
• Technology can be sued by companies to gain a competitive advantage and
should be acquired to support the company’s chosen competitive priorities
• Productivity is a measure that indicates how efficiently an organization is using
its resources
• Productivity is computed as the ratio or organizational outputs divided by
inputs

Mba om 03_operation_strategyandcompetitiveness

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