CHAPTER 2: OPERATIONS STRATEGY FOR COMPETETIVE ADVANTAGE

Objectives:
 Define basic terms
 Discuss mission and strategy
 Identify levels of strategy
 Describe how to formulate corporate and operations strategies
 Discuss how operations strategy provide competitive advantages

2.1. Identifying Missions and Strategies

An effective operations manager must identify a mission (the reason for its existence) and a
strategy so he knows how to get goal. This is the case for all organization.

2.1.1. Mission
An organization's mission is the basis of the organization- the reason for its existence. Missions
vary from organization to organization, depending on the nature of their business. It is important
that an organization have a clear and simple mission statement, one which answers the question,
"What business are we in?" The mission statement should serve to guide formulation of
strategies for the organization as well as decision making at all levels.

We can also define the organization’s mission as its purpose—what it will contribute to society.
Mission statements provide boundaries and focus for organizations and the concept around
which the firm can rally. The mission states the rationale for the organization’s existence.
Developing a good strategy is difficult, but it is much easier if the mission has been well defined.

Once an organization’s mission has been decided, each functional area within the firm
determines its supporting mission. By functional area we mean the major disciplines required by
the firm, such as marketing, finance/accounting, and production/operations. Missions for each
function are developed to support the firm’s overall mission. Then within that function lower-
level supporting missions are established for the OM functions. Table 2.2 provides such a
hierarchy of sample missions.

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Table 2.1: Missions for a Company, Operations Function, & Major OM Departments
Sample Company Mission: To manufacture and service an innovative, growing, and
profitable worldwide microwave communications business that exceeds our customers’
expectations.
 Sample Operations Management Mission: To produce products consistent with the
company’s mission as the worldwide low-cost manufacturer quality & inherent customer
value.
 Product design: To design and produce products and services with outstanding quality and
inherent customer value.
 Quality management: To attain the exceptional value that is consistent with our company
mission and marketing objectives by close attention to design, supply chain, production, and
field service opportunities.
 Process design: To design and develop the production process and equipment that will be
compatible with low-cost product, high quality, and a good quality of work life.
 Location: To locate, design, and build efficient and economical facilities that will yield high
value to the company, its employees, and the community.
 Layout design: To achieve, through skill, imagination, and resourcefulness in layout and
work methods, production effectiveness and efficiency while supporting a high quality of
work life.
 Human resources: To provide a good quality of work life, with well-designed, safe,
rewarding jobs, stable employment, and equitable pay, in exchange for outstanding
individual contribution from employees at all levels.
 Supply-chain management: To collaborate with suppliers to develop innovative products
from stable, effective, and efficient sources of supply.
 Inventory: To achieve low investment in inventory consistent with high customer service
levels and high facility utilization.
 Scheduling: To achieve high levels of throughput and timely customer delivery through
effective scheduling.
 Maintenance: To achieve high utilization of facilities and equipment by effective preventive
maintenance and prompt repair of facilities and equipment.

2.1.2. Strategy
The Word ‘strategy’ is derived from the Greek term ‘strategos’, meaning a carefully formulated
military action. It is a plan of action to win a war. Here military identifies the quality and
quantity of resources to be mobilized and used at the most appropriate time in suitable and
convenient manner to win a war. In business context, mobilizing and deploying resources
systematically and attain organizational goal.

With the mission established, strategy and its implementation can begin. Strategy is an
organization’s action plan to achieve the mission. Each functional area has a strategy for

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achieving its mission and for helping the organization reach the overall mission. These strategies
exploit opportunities and strengths, neutralize threats, and avoid weaknesses.

Firms achieve missions in three conceptual ways: (1) differentiation, (2) cost leadership, and (3)
response. This means operations managers are called on to deliver goods and services that are (1)
better , or at least different, (2) cheaper, and (3) more responsive. Operations managers translate
these strategic concepts into tangible tasks to be accomplished. Any one or combination of these
three strategic concepts can generate a system that has a unique advantage over competitors.

2.1.3. Strategies and Tactics

A mission statement provides a general direction for an organization and gives rise to
organizational goals, which provide substance to the overall mission. For example, one goal of
an organization may be to capture a certain percent of market share for a product; another goal
may be to achieve a certain level of profitability. Taken together, the goals and the mission
establish a destination for the organization.

Strategies are overall plans for achieving goals. If you think of goals as destinations, then
strategies are the road maps for reaching the destinations. Strategies provide focus for decision-
making.

Tactics are the methods and actions used to accomplish strategies. They are more specific in
nature than strategies, and they provide guidance and direction for carrying out actual
operations, which need the most specific and detailed plans and decision-making in an
organization. You might think of tactics as the “how to” part of the process (e.g., how to reach
the destination, following the strategy road map) and operations as the actual “doing” part of the
process.

It should be apparent that the overall relationship that exists from the mission down the actual
operations is hierarchical in nature. That means we start with Mission- Goal- Strategy- Tactics-
and finish with Operations.

2.1.4. Levels of strategy

There are three levels of strategy
1. Corporate level strategy: Corporate strategies are concerned with the type of business
the organization is in, its overall competitive position and how the resources of the
organization have to be deployed.
2. Business level strategy: The business strategies are basically competitive strategies.
The objectives of these strategies are about how to compete successfully in particular
markets, and how can the business units acquire competitive advantage.

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 Business Strategies are the course of action adopted by a firm for each of its business
separately to serve identified customer groups and provide value to the customer by
satisfaction of their needs. In the process the firm uses its competencies to gain, sustain,
and enhance its strategies or competitive advantage.
3. Functional level strategy: Functional strategy is the approach; a functional area takes to
achieve corporate and business unit objectives and strategies by maximizing resource
productivity. It helps managers in focusing company’s major functional areas of activity.
 Types of functional strategies
 Are Manufacturing (production) strategy, Marketing strategy, Human resource
strategy, Research and development strategy, Financial management strategy

2.2. Strategy Formulation

2.2.1. Corporate Strategy Formulation
A company’s strategy is developed after its managers have considered many factors and have
made some strategic decisions.
These include developing an understanding of:
 what business the company is in (the company’s mission),
 analyzing and developing an understanding of the market (environmental scanning), and
 Identifying the company’s strengths (core competencies).
These three factors are critical to the development of the company’s long-range plan, or strategy.

In this section we describe each of these elements in detail and show how they are combined to
formulate the strategy.

A. Mission
Every organization has a mission. The mission is a statement that answers three overriding
(dominating) questions:
 What business will the company be in?
 Who will the customers be, and what is the expected customer attributes?
 How will the company’s basic beliefs define the business?

B. Environmental Scanning
A second factor to consider when we are developing strategy is external and internal
environmental scanning. It is the monitoring of events and trends that present as either threats or
opportunities and as either strengths or weaknesses for the organization.

C. Core competencies
The third factor that helps define a strategy is an understanding of the company’s strengths.
These are called core competencies.

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In order to formulate a long-term plan, the company’s managers must know the competencies of
their organization. Organizational core competencies are summarized in the following table:

Table 2-2: Organizational core competences

1. Workforce Highly trained
Responsive in meeting customer needs
Flexible in performing 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

Finally, Choice of Strategy- The best course of action is actually chosen after considering organizational
goals, organizational strengths, potential and limitations as well as the external opportunities. After
assessing internal and external factors and determine an organization’s distinctive competence, a
strategy or strategies must be formulated that will give the organization the best chance of
success.

2.2.2. Operations Strategy

Operations strategy is a plan of action implemented by a firm that describes how they will
employ their resources in the production of a product or service.

An operations strategy is typically driven by the overall strategy of the organization, and is
designed to maximize the effectiveness of production and support elements while minimizing
costs.

Operation strategy is narrower in scope, deals primarily with the operations aspect of the
organization. Operations strategy relates to products, processes, quality, cost, lead times, and
scheduling. Table 2.3 provides a comparison of an organization’s mission, its overall strategy,
and its operations strategy, tactics, and operations.

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Table 2.3 Comparison of mission, organization strategy, and operations strategy
Mgt Time Scope Level of Relates to
level horizon detail
The overall Mission Top Long Broad Low Survival, profitability
organization Strategy Senior Long Broad Low Growth rate, market share
Production/ Strategic Senior Moderate Broad Low Product design, choice of location,
operations to long choice of technology, new facilities
Tactical Middle Moderate Moderate Moderate Employment levels, output levels,
equipment selection, facility layout
Operational Low Short Narrow High Scheduling, personnel, adjusting
output rates, inventory management,
purchasing

2.2.3. Operation Strategy Formulation

There are many alternative procedures for developing an operations strategy for a particular
organization. These will generally start with review of corporate level mission and strategy and
then require an analysis of market requirements (marketing) and the operation’s resource
capabilities (operations).

Hill framework can be used in Operations Strategy Formulation. It consists of five steps:
1. Define corporate objectives – start from the overall strategy of an organization to develop
operations strategy.
2. Determine marketing strategies to meet these objectives: This involves identifying target
markets and how to compete in these markets.
3. Assess how different products win orders against competitors: How do products win
orders in the market place? This is the crucial stage in Hill’s methodology where any
mismatches between the requirements of the organization’s strategy and the operations’
capability are revealed. This step provides the link between corporate marketing proposals and
the operations processes and infrastructure necessary to support them.
This is achieved by translating the marketing strategy into a range of competitive factors (e.g.
price, quality, delivery speed) on which the product or service wins orders. These external
competitive factors provide the most important indicator as to the relative importance of the
internal operations performance objectives.

Hill distinguishes between the following types of competitive factors which relate to securing
customer orders in the marketplace.
 Order-winning factors – They are key reasons for customers purchasing the goods or
services and raising the performance of the order-winning factor may secure more
business
 Qualifying factors – Performance of qualifying factors must be at a certain level to gain
business from customers.
From the descriptions above it can be seen that it is therefore essential to meet both qualifying
and order-winning criteria in order to be considered and then win customer orders.

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4. Establish the most appropriate mode to deliver these sets of products: Process types are
ways of describing the general approach taken to designing and managing processes. They
are based on two important factors in process design: the volume and variety of the products
and services that an organization processes.
5. Provide the infrastructure required to support operations: Planning and Control in
Operation is about reconciling market requirements (demand) with the operation’s resources
(supply). Planning determines the timing and nature of actions that should take place in the
future. Control is when as the operation is ongoing, determining what action to take if there is
a significant deviation from what should be happening. In reality planning and control
activities are intertwined in an ongoing organization. Competitive strategy and customer
prioritizes.
2.3. Achieving Competitive Advantage through Operations
Competitiveness: How effectively an organization meats the wants and needs of customers
relative to others those offer similar goods or services. Marketing influences competitiveness in
several ways, including identifying consumer wants and needs, pricing, and advertising, and
promotion. Operations has a major influence on competitiveness through product and service
designs, cost, location, quality, response time, flexibility, inventory and supply chain
management, and service quality.

Competitive advantage implies the creation of a system that has a unique advantage over
competitors. The idea is to create customer value in an efficient and sustainable way. The three
strategies that provide an opportunity for operations managers to achieve competitive advantage
are differentiation, low cost and response. It is, therefore, very critical for operations managers
to implement some combination of these three strategies as they provide an opportunity for any
business to achieve competitive advantage.
1. Competing on Differentiation: Differentiation is more concerned about providing
unique and innovative products, it should be regarded as going beyond products and
service attributes to encompass everything that positively influences the value that
customers derive from it. This idea of differentiation creates customer experience as it
serves as a bridge to engage customers.
2. Competing on Cost: One driver of a low-cost strategy is an optimal facility that is
effectively utilized. Low-cost leadership entails achieving maximum value as defined by
your customer. It requires examining each of the different operation management
decisions in a relentless effort to drive down costs while meeting customer expectations
of value.
3. Competing on Response: Response consists of being reliable, and capable of providing
quick and flexible responses. Flexible response could be defined as the ability to quickly
adapt to and keep up with the changes in the market place. The idea of response also
means that businesses need to be able to develop and deliver innovative products in a
timely manner while creating customer value and experience.