CHAPTER TWO

OPERATIONS STRATEGY
AND COMPETITIVENESS

Dr. Mulugeta K.
Department of Management
Basic concepts

• Competitiveness:
– How effectively an organization meets the wants and
needs of customers relative to others that offer similar
goods or services
– Organizations compete through some combination of their
marketing and operations functions
• What do customers want?
• How can these customer needs best be satisfied?
• Strategies:
– means for achieving organizational goals
Business Strategy: Introduction

• To maintain a competitive position in the marketplace, a

company must have a long-range plan.
• This plan needs to include:
– the company’s long-term goals,
– an understanding of the marketplace, and
– a way to differentiate itself from its competitors.
• All other decisions made by the company must support this
long-range plan.
 Cont…

• The long-range plan of a business, designed to provide and

sustain shareholder value, is called the business strategy.

• For a company to succeed, the business strategy must be

supported by the key business functions [operations, finance,
and marketing].
Relationship between business strategy and the functional
strategies
Operations Strategy

• Operations strategy is a long-range plan for the operations

function that specifies the design and use of resources to
support the business strategy.

• Two companies operating in the same industry may pursue

different business strategies.

• Example [two most successful airline companies]:

– Southwest Airlines: which has a strategy to compete on cost.
– Singapore Airlines: which has a strategy to compete on service.
 Cont…

 Southwest Airlines:
– offers low-cost services aimed at price-sensitive customers.
– To support this strategy, every aspect of Southwest’s
operations is focused on cutting costs out of the system.
 Singapore Airlines
– Provides excellent services for premium price.
– To support this strategy the airline offers:
• free drinks, complimentary headsets, meals prepared by gourmet
chefs, comfortable cabins, and even the biggest bed in business
class called the “space bed.”
The Role of Operations Strategy

 The role of operations strategy is to:

• provide a plan for the operations function so that it can make
the best use of its resources which;
– Specifies the policies and plans for using organizational
resources
– Supports Business Strategy as shown on next slide
• Operations strategy specifies the policies and plans for using
organizational resources to support its long-term competitive
strategy.
 Cont…

• This includes:
– the location, size, and type of facilities available;
– worker skills and talents required;
– use of technology,
– special processes needed,
– special equipment required; and
– quality control methods.
 Cont…

• The operations strategy must be aligned with the company’s

business strategy to enable the company achieve competitive
edge.
• For example:
– The business strategy of FedEx, the world’s [currently 3rd] largest
provider of expedited delivery services, is to compete on time
and dependability of deliveries.
• The operations strategy of FedEx developed a plan for resources
to support its business strategy.
– For speed of delivery, FedEx acquired its own fleet of airplanes.
– For dependability of deliveries, FedEx invested in a sophisticated bar
code technology to track all packages.
Developing a Business Strategy

• A business strategy is developed after taking into many factors

and following some strategic decisions such as;
1. The Mission
– The purpose of the organization (the very reason for its
existence)
– It states what business is the company in, and provides
boundaries and focus
– In order to develop a long-term plan companies must first
know exactly what business they are in, what customers
they are serving, and what the company’s values are.
 Cont…

2. Environmental Scanning
– Analyzing and understanding the business environment for
market trends threats and opportunities.
– It calls for an understanding of PEST forces.
3. Core Competencies
– Identifying the unique strengths that can help companies
win in the market.
– This may include: strength of workers, modern facilities,
market understanding, best technologies, financial know-
how.
 Cont…

1 Workforce Highly trained

competencies : Example

Responsive in meeting customer demands

Organizational core

Flexible in performing a variety of tasks

Strong technical capability
Creative in product design
2 Facilities Flexible in producing a variety of products
Technologically advanced
An efficient distribution system
3 Market understanding Skilled in understanding customer wants, and
predicting market trends
4 Financial know-how Skilled in attracting and raising capital
5 Technology Use of latest production technology
Use of information technology
Quality control techniques
 Cont…

• To be successful, a company must compete in markets where

its core competencies will have value.
• Highly successful firms develop a business strategy that takes
advantage of their core competencies or strengths.
• Increased global competition has driven many companies to
clearly identify their core competencies and outsource those
activities considered noncore.
• Outsourcing is letting other companies handle a part of the
organizational tasks or obtaining products from them.
• By outsourcing noncore activities, a company can focus on its
core competencies.
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 called competitive priorities.
• By excelling in one of these capabilities, a company can
become a winner in its market.
Operations Strategy and the Designing the Operations Function
Competitive Priorities

• Are capabilities that the operations function can develop in

order to give a company a competitive advantage in market.
• They are the special attributes or abilities that give an
organization a competitive edge.
• There are four broad categories of competitive priorities:
1. Cost
2. Quality
3. Time (Speed)
4. Flexibility
1. Cost

• Offering product at a low price relative to the competitors.

• To support this strategy the operations function goes for:
– Typically high volume products
– Often limit product range & offer little customization
– May invest in automation to reduce unit costs
– Probably use product focused layouts
– Eliminate all waste or cutting costs in the system
• However, low cost does not mean low quality
2. Quality

• Quality as a competitive priority has two dimensions.

• These are:
a. High performance design:
• Superior features, high durability & excellent service
b. Product & service consistency:
• Meets design specifications, close tolerances and error
free delivery (Example: McDonalds)
• Quality needs to address
– Product design quality: product meets requirements
– Process quality: error free products
3. Time/Speed

• Considering time/speed, first that can deliver often wins the

race. (Example: FedEx, UPS, DELL, DHL)
– It’s because today’s customers don’t want to wait.
• There are two dimensions of time/speed priority:
a. Rapid delivery:
• Focused on shorter time between order placement
and delivery.
b. On-time delivery:
• Deliver product exactly when needed every time.
4. Flexibility

• It represents the company’s ability to readily accommodate

changes in business environment including customer needs and
expectations.
• The two dimensions of flexibility are:
a. Product flexibility:
• Easily switch production from one item to another
• Easily customize product to meet specific requirements.
b. Volume flexibility:
• Ability to ramp production up and down to match market
demands.
The Need for Trade-offs

• Companies that compete based on flexibility often cannot

compete based on speed. [Same goes for quality, cost and speed]
– because it generally requires more time to produce a
customized product.
• Flexible companies typically do not compete based on cost.
– because it may take more resources to customize the
product.
• However, flexible companies often offer greater customer
service and can meet unique customer requirements.
• Therefor, decisions companies make require trade-offs
 Cont….

• The operations function needs to give special focus to some

priorities but not all.
• The operations function must place emphasis on those priories
that directly support the business strategy.
• One way that large facilities with multiple products can address
the issue of tradeoffs is using the concept of plant-within-a-
plant (PWP):
– A concept introduced by well-known Harvard professor Wickham
Skinner.
• The PWP concept suggests that different areas of a facility
should pursue different competitive priorities.
Order Winners and Order Qualifiers

• Order qualifiers and order winners help a company decide

which competitive priorities to focus on.
 Order Qualifier (s):
– It is a characteristics that customers perceive as minimum
standards of acceptability for potential purchase
– are those competitive priorities that a company has to meet
if it wants to do business in a particular market.
 Order Winner:
– It is a characteristics of an organization’s products that cause
it to be perceived as better than the competition
 Cont…

– Order winners are the competitive priorities that help a

company win orders in the market.
 Example:
• Consider a simple restaurant that makes and delivers pizzas.
Order qualifiers might be low price (say, less than $10.00) and
quick delivery (say, under 15 minutes), because this is a standard
that has been set by competing pizza restaurants. The order
winners may be “fresh ingredients” and “home-made taste.”
These characteristics may differentiate the restaurant from all the
other pizza restaurants.
 Cont…

• However, order winners and order qualifiers change over

time.

Often when one company in a market is successfully competing using a

particular order winner, other companies follow suit over time. The
result is that the order winner becomes an industry standard or an
order qualifier.
• Therefore, to compete successfully, companies then have to
change their order winners and differentiate themselves.
Sample Strategies

Examples of Companies or
Organizational Strategy Operations Strategy Services
Low Price Low Cost U.S. first-class postage
Wal-Mart
High Quality High performance design Sony TV
and/or high quality Lexus
processing
Consistent Quality Coca-Cola; electric power
Short Time Quick Response McDonald’s Restaurants
Express mail
On-time delivery FedEx; One-hour photo
Newness Innovation 3M, Express mail
Variety Flexibility Burger King (Have it your way”)
Volume McDonald’s (“Buses Welcome”)
Service Superior customer service Disneyland, IBM

Location Convenience Supermarkets, Mall Stores

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