Manufacturing Strategy

Lecture 3

Professor Bernard Hon School of Engineering

Outline of Lecture 3

Concept of strategy. Hierarchical nature of strategy. Generic competitive advantages.

How to achieve Competitive Manufacturing

Product strategy Technology strategy Manufacturing strategy Systems and People

Original Meaning of Strategy

The word strategy is derived from the Greek military term strategos, meaning the generals art.

The Concept of Strategy

Strategy is the approach or means by which an organisation seeks to develop the distinctive competencies that will deliver its desired competitive advantage.

Strategy A Definition

A general method for achieving specific objectives. It describes the essential resources and their amounts, which are to be committed to achieving those objectives. It describes how resources will be organized, and the policies that will apply for the management and use of those resources.

John Stark Associates

Characteristics of a Strategy

Time horizon Impact Concentration of effort Pattern of decisions Pervasiveness

Manufacturing Strategy
A manufacturing f t i strategy t t is i defined d fi d b by a pattern of decisions, both structural and infrastructural, which determine the capability of a manufacturing system and specify how it will operate in order to meet a set of manufacturing objectives which are consistent with overall business objectives.
Platts 1990

Structural and Infrastructural Aspects of Manufacturing Decisions

Capacity Facilities Equipment and process tech. Vertical integration Vendors New products Human resources Quality Systems Amount, timing, type Size, location, specialisation Scale, flexibility, interconnectedness

Direction, extent, balance Number, structure, relationship Hand-off, start-up, modification Selection and training, compensation, security Definition, role, responsibility Organisation, schedules, control

Three Levels of Strategy

Co po ate st Corporate strategy ategy : se serves es to de define et the e bus businesses esses in which the corporation will participate and those in which it will not participate. Business strategy : defines the scope or boundaries of the business and the basis on which that business unit will compete. Function strategy : is concerned with how the function will support the desired competitive advantage and how it will complement and interact with other functional strategies.

Hierarchical Nature of Strategy

Corporate strategy

Business A strategy

Business B strategy

Business C strategy

Marketing sales strategy

Manufacturing strategy

R&D strategy

Accounting / control strategy

Typical Industrial Response - 1

Our manufacturing organisation will seek to produce the highest quality products at the lowest cost while providing the best set of services and reliability possible. We will not knowingly compromise on product quality, dependability or flexibility. We seek to be the best manufacturer in our industry.

Typical Industrial Response - 2

The manufacturing strategy is here -

volumes of annual operating plan and elements of a long-range plan.

Typical Industrial Response - 3

A full description on the means by which the capabilities of the manufacturing function are developed to support the desired competitive advantage of the business unit, and to complement the efforts of the other functions

Porters Generic Competitive Advantage

Low cost Differentiation Focus

M. Porter (1980)

Hayes & Wheelwrights Generic Competitive AdvantageAdvantage- 1

Low cost/price High performance

Product features, tolerances Customer service Product Delivery Field service/repair

Dependability

Hayes & Wheelwrights Generic Competitive AdvantageAdvantage- 2

Flexibility

Broad product line Customised products Fast response/delivery times New products Latest technologies

Innovativeness

Four Generic Strategies

Source of Competitive p Advantage g
Cost Uniqueness

Broad target

Cost leadership

Differentiation

Breadth of Competitive C titi Scope

Narrow target

Focused Low-Cost

Focused Differentiation

M. E. Porter

Competitive Strategy - 1

Low-Cost Leadership

Competitive Strategy 1 - Cost Leadership

Relatively high market share Favourable access-to-price of raw material Product designed for ease of manufacture Wide range g of related p product to spread p costs Substantial capital investment in state-of-the-art equipment

Price vs Market Share

Average price $000s, 1997 70

60

50

40

30

20

10

0 1 Source: JP Morgan 2 3 4 5 6 7 8 9 FT 22/03/1999 Global volume (millions of units)

Cost Leadership - Cost Reduction Methods

Build agile and flexible facilities. Tight control of production costs and overhead. Minimise costs of sales, R&D and services. State-of-the-art manufacturing facilities. Monitor outsourcing costs. Simplify business processes.

Hitt, Ireland & Hoskisson

Cost Leadership Major Risks

Dramatic technological change could take away your cost advantage- disruptive technology. Competitors may learn how to imitate Value Chain. Focus on efficiency could cause Cost Leader to overlook changes in customer preferences- Ford F d.

Choices That Drive Costs

Economies of scale Asset utilization Capacity utilization pattern

- Seasonal - Cyclical

Interrelationships
- Order processing and di t ib ti distribution

Value chain linkages

- Advertising & Sales - Logistics & Operations

Product features Performance Mix & variety of products Service levels Small vs large buyers Process technology Wage g levels Product features Hiring, training, motivation.

Three Key Questions

How can an activity H ti it b be performed f d differently or even eliminated? How can a group of linked value activities be regrouped or reordered? How might partnership with other companies lower or eliminate costs?

Examples of ValueValue-Creating Activities Associated with the Cost Leadership Strategy

FIRM INFRASTRUCTURE HUMAN RESOURCE DEPARTMENT TECHNOLOGY DEVELOPMENT Cost-effective management a age e t information systems. Consistent policies to reduce turnover costs. Easy-to-use manufacturing technologies. Systems and procedures to find the lowest-cost (with acceptable quality) products to purchase as raw materials. Highly efficient systems to link suppliers suppliers products with the firms production processes. Use of economies of scale to reduce production costs. costs A delivery schedule that reduces costs costs. Relatively few managerial layers in order to reduce overhead costs. Simplified planning practices to reduced planning costs. Intense and effective training programs to improve worker efficiency and effectiveness. Investments in technologies in order to reduce costs associated with a firms manufacturing processes. Frequent evaluation processes to monitor suppliers performances. A small, highly trained sales force force. Efficient and proper product installations in order to reduce the frequency and severity of recalls.

PROCUREMENT

Construction of efficient-scale production facilities.

Selection of low-cost transportation carriers.

Products priced so as to generate significant sales volume.

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING AND SALES

SERVICE

M. E. Porter

Competitive Strategy - 2

Differentiation

Competitive Strategy 2 - Differentiation

Creative flair
Strong research and development Strong marketing Ability to respond to market changes very quickly

Differentiation - Key Criteria

Value provided by unique features and characteristics. Command premium price. Outstanding customer services. Superior p q quality. y Prestige or exclusivity. Constant innovation.

Differentiation Strategy Requirements

Constant effort to differentiate products through:

Capability in R&D. Developing new systems and processes. Quality focus. Ma imise staff contrib Maximise contributions tions thro through gh lo low turnover, high motivation and teamwork.

Some Drivers of Differentiation

U i Unique product d tf features t Unique product performance. Exceptional services. Innovative technologies. Quality y input p and p procedures. Exceptional skills or experience. In-depth knowledge.

Differentiation by Product Features

The razor blade example. The remote control example. Integrated product/services example (Mercedes tyre deal, iTunes).

Differentiation Driven Companies - Examples

Brand image, e.g. Nike Innovation, e.g. iPad Design, e.g. Bang & Olufsen Services, e.g. Singapore Airline Quality, e.g. Mercedes First to market, e.g. eBay

Major Risks of a Differentiation Strategy

Customers may decide that the cost of uniqueness is too great. Competitors may learn how to imitate Value Chain. The means of uniqueness may no longer be valued by customers.

Examples of Value-Creating Activities Associated with the Differentiation Strategy

FIRM INFRASTRUCTURE HUMAN RESOURCE DEPARTMENT TECHNOLOGY DEVELOPMENT Highly developed information systems to better understand customers purchasing preferences. Compensation programs intended to encourage worker creativity and productivity. Strong capability in basic research. Systems and procedures used to find the highest-quality raw materials. Superior handling of incoming raw materials so as to minimize damage and improve the quality of the final product. Consistent manufacturing of attractive products. products A companywide emphasis on the importance of producing high-quality products. Somewhat extensive use of subjective rather than objective performance measures. Superior personnel training.

Investments in technologies that will allow the firm to consistently produce highly differentiated products. Purchase of highest-quality replacement parts. Accurate and responsive orderprocessing procedures. Extensive granting of credit buying arrangements for customers. Extensive personnel relationships with buyers and suppliers. Extensive buyer training to assure high-quality product installations installations.

PROCUREMENT

Rapid responses to customers unique manufacturing specifications.

Rapid and timely product deliveries to customers.

Complete field stockings of replacement parts.

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING AND SALES

SERVICE

M. E. Porter

Competitive Strategy - 3

Focus

Focus Strategy - Opportunities

L Large companies i may overlook l k small ll niche i h market- Strix. May lack resources to compete industry-wide. Ability to serve a narrow market segment more effectively than industry-wide competitors. Allow to direct resources to certain value chain activities to build competitive advantage.

Examples of Focus

Microsoft PC software Carl Zeiss Precision Lens Rolls Royce Prestigious Car Intel Microprocessor Unilever FMCG Ferrari High performance sports car Strix Thermostatic control

Strix

World leader on thermostatic control for jugs and kettles. A Strix product is used more than 1,000,000,000 times everyday around the world by approximately 20% of the World population! Used by Braun, Tefal, Siemens, , Philips, p , Russell Hobbs, , Kenwood, Murphy Richards, Rowenta, Bimatek.

Competitive Strategy - Combination

Focus

+ Differentiation

An Example of Focus and Differentiation

Giorgio Armani Emporio Armani A Armani iE Exchange h