OPERATIONS MANAGEMENT

1.0 Introduction to OM

Evolution of Operations Management (The history of Operations Management).

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1.1 What is Operations management all about?

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What is operations:

The part of the business organisation that is responsible for providing goods or services.

What is Operations Management

Management of ANY activities(systems) /process that create goods and/or provide services.

Operations affect:

 Companies’ ability to compete.

 Nations ability to compete internationally.

Why study OM

 Core of all business organizations.

 Many areas interrelated with OM activities.
 Management of operations is critical to create and maintain competitive advantages.

While the operations function is responsible for producing products and/or delivering services, it
needs the support and input from other areas of the organization. Business organizations have
three basic functional areas, finance, marketing, and operations.

It doesn’t matter whether the business is a retail store, a hospital, a manufacturing firm, or some
other type of business; all business organizations have these three basic functions. Finance is
responsible for securing financial resources at favourable prices and allocating those resources

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throughout the organization, as well as budgeting (plan financial requirements), analysing
investment proposals, and providing funds for operations. Marketing and operations are the
primary, or “line,” functions.
Marketing is responsible for assessing consumer wants and needs, and selling and promoting
the organization’s goods or services, Assessing customer wants and needs, communicating those
needs to operations .
Operations is responsible for producing the goods or providing the services offered by the
organization and value addition

There is need for the three to work closely together. Operations management as you will be
aware interfaces with various departments within the organisation

Industrial
Engineering Maintenance

Distribution
Operations Public Relations

Purchasing Personnel
Accounting

Value addition

The creation of goods or services involves transforming or converting inputs into outputs.
Various inputs such as capital, labour, and information are used to create goods or services using
one or more transformation processes (e.g., storing, transporting, repairing, etc). To ensure that
the desired outputs are obtained, an organization takes measurements at various points in the
transformation process (feedback) and then compares them with previously established standards
to determine whether corrective action is needed (control). Figure below depicts the conversion
system.

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KEY ISSUES FOR TODAY’S BUSINESS OPERATIONS

There are a number of issues that are high priorities of many business organizations. Although
not every business is faced with these issues, many are. Chief among the issues are the
following:

a) Economic conditions.
The lingering recession and slow recovery in various sectors of the economy has made managers
cautious about investment and rehiring workers that had been laid off during the recession.

b) Innovating.
Finding new or improved products or services are only two of the many possibilities that can
provide value to an organization. Innovations can be made in processes, the use of the Internet,
or the supply chain that reduce costs, increase productivity, expand markets, or improve
customer service.

c) Quality problems.
The numerous operations failures underscore the need to improve the way operations are
managed. That relates to product design and testing, oversight of suppliers, risk assessment, and
timely response to potential problems.

d) Risk management.

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The need for managing risk is underscored by recent events that include the crisis in housing,
product recalls, oil spills, and natural and man-made disasters, and economic ups and downs.
Managing risks starts with identifying risks, assessing vulnerability and potential damage
(liability costs, reputation, demand), and taking steps to reduce or share risks (mitigation).

e) Competing in a global economy.

Low labour costs in third-world countries have increased pressure to reduce labour costs.
Companies must carefully weigh their options, which include outsourcing some or all of their
operations to low-wage areas, toll manufacturing, reducing costs internally, changing designs,
and working to improve productivity. Three other key areas require more in-depth discussion:
environmental concerns, ethical conduct, and managing the supply chain.

1.2 Responsibilities of Operations Management (Management responsibilities).

a) Planning
 Capacity, utilization
 Location analysis
 Choosing products or services
 Make or buy decisions.
 Layout
 Projects
 Scheduling
 Market share
 Plan for risk reduction, plan B?
 Forecasting

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b) Controlling
– Inventory
– Quality
– Costs
c) Organization
– Degree of standardization.
– Subcontracting.
– Process selection.
d) Staffing
– Hiring/lay off
– Use of overtime.
– Incentive plans
– Job assignments
e) Leading

"Leading is the use of influence to motivate employees to achieve organizational goals"

(Richard Daft).Managers must be able to make employees want to participate in achieving an
organization's goals. Three components make up the leading function:

– Motivating employees.
– Influencing employees.

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 – Forming effective groups.

"Management is doing things right; leadership is doing the right things."-Peter Drucker

Other functions of OPM

Operations Management is a branch that deals with managing operations and processes within
the organisation. Efficacious management of operations ensures successful delivery of the
project. The operation manager optimises the operations by making judicious use of resources
and capital. They manage all the aspects related to the operations that take place in businesses.
Operation managers are not only found in a company but also in manufacturing units. They are
required to perform various functions as a part of their job responsibilities. Some of the key
functions of an Operations Manager includes:

1. Finance

Finance plays a chief role in operations management. It is essential to ensure that the
organization’s finance has been utilized properly to carry out major functions such as the
creation of goods or services so that the customer’s needs could be satisfied.

2. Operation

This function in operation management is mainly concerned with planning, organising,

directing and controlling all the activities of an organisation which helps in converting the raw
materials and human efforts into valuable goods and services for satisfying customer needs.

3. Strategy

Strategy in operation management refers to planning tactics that could help them to optimise
the resources and have a competitive edge over others. Business strategies imply to supply chain
configuration, sales, capacity to hold money, optimum utilisation of human resources and many
more.

4. Design of the product

Incorporating innovative technologies play a crucial role in the selling of a product. Thus it is the
duty of operations manager to ensure that the product is designed catering to the market trends
and needs of the customers. The modern-day customers are more concerned about the quality of
the product than its quantity. So, the operation managers focus on producing top-notch quality
products.

5. Forecasting

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Forecasting refers to the process of making an estimation regarding certain events that might
occur in the future. In operation management, forecasting refers to the estimation of customer’s
demand so that production can be done accordingly. Through this, the manager gets to know
what to produce, when to produce and how to produce in accordance with the customer’s needs.

6. Supply Chain Configuration

The main motive of Supply Chain Configuration is to ensure effective management, monitoring
and controlling of all the main activities that are held in a firm. The supply chain configuration
starts from the supply of the raw materials and continues till the production of the final product
and then their selling to the customers which will satisfy their needs and wants.

7. Managing the Quality

Quality management plays an imperative role in selling a product. The operation managers
allocate the task of quality management to a team and then supervise their task. The managers
identify project defects and rectify them to ensure quality. For this, certain systems are used that
measure and maintain the quality of the product.

8. Motivating employees.

What motivates people?

1.3 MANUFACTURING AND SERVICE OPERATIONS.

Operations can be classified in 2broad categories as either manufacturing or service.

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Manufacturing organisations:

Produce physical, tangible it which can be stored as inventory before delivery to customer.

Service organisations-

Produce intangible items that cannot be produced ahead of time, because services are intangible
then it follows that they cannot have a store of finished goods.

In reality most operations systems produce a mixture of goods and services while many services
will have supporting goods

Manufacturing vs Services

Distinction between Manufacturing Operations and Service Operations

Following characteristics can be considered for distinguishing manufacturing operations with
service operations:

1. Tangible/Intangible nature of output

2. Consumption of output
3. Nature of work (job)
4. Degree of customer contact
5. Customer participation in conversion
6. Measurement of performance.

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Manufacturing is characterised by tangible outputs (products), outputs that customers consumer
overtime, jobs that use less labour and more equipment, little customer contact, no customer
participation in the conversion process (in production), and sophisticated methods for measuring
production activities and resource consumption as product are made.

Service is characterised by intangible outputs, outputs that customers consumes immediately,

jobs that use more labour and less equipment, direct consumer contact, frequent customer
participation in the conversion process, and elementary methods for measuring conversion
activities and resource consumption. Some services are equipment based namely rail-road
services, telephone services and some are people based namely tax consultant services, hair
styling.

A Framework for Managing Operations

Managing operations can be enclosed in a frame of general management function as shown in Fig below.
Operation managers are concerned with planning, organizing, and controlling the activities which affect
human behaviour through models.

PLANNING
Activities that establishes a course of action and guide future decision-making is planning.
The operations manager defines the objectives for the operations subsystem of the organization, and the
policies, and procedures for achieving the objectives. This stage includes clarifying the role and focus of
operations in the organization’s overall strategy. It also involves product planning, facility designing and
using the conversion process.

ORGANIZING
Activities that establishes a structure of tasks and authority.
Operation managers establish a structure of roles and the flow of information within the operations
subsystem. They determine the activities required to achieve the goals and assign authority and
responsibility for carrying them out.

CONTROLLING
Activities that assure the actual performance in accordance with planned performance. To ensure that
the plans for the operations subsystems are accomplished, the operations manager must exercise control
by measuring actual outputs and comparing them to planned operationsmanagement. Controlling costs,
quality, and schedules are the important functions here.

BEHAVIOUR
Operation managers are concerned with how their efforts to plan, organize, and control affect human
behaviour. They also want to know how the behaviour of subordinates can affect management’s planning,
organizing, and controlling actions. Their interest lies in decision-making behaviour.

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MODELS
As operation managers plan, organise, and control the conversion process, they encounter many problems
and must make many decisions. They can simplify their difficulties using models like aggregate planning
models for examining how best to use existing capacity in short-term, break even analysis to identify
break even volumes, linear programming and computer simulation for capacity utilisation, decision tree
analysis for long-term capacity problem of facility expansion, simple median model for determining best
locations of facilities etc.

2 CONCEPT OF PRODUCTION MANAGEMENT:

Production function is that part of an organization, which is concerned with the transformation of
a range of inputs into the required outputs (products) having the requisite quality level.

Production is defined as “the step-by-step conversion of one form of material into another form
through chemical or mechanical process to create or enhance the utility of the product to the

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user.” Thus production is a value addition process. At each stage of processing, there will be
value addition.
Edwood Buffa defines production as ‘a process by which goods and services are created’.

Some examples of production are: manufacturing custom-made products like, boilers with a
specific capacity, constructing flats, some structural fabrication works for selected customers,
etc., and manufacturing standardized products like, car, bus, motor cycle, radio, television, etc.

2.1 Production System:

The production system of an organization is that part, which produces products of an
organization. It is that activity whereby resources, flowing within a defined system, are
combined and transformed in a controlled manner to add value in accordance with the policies
communicated by management. A simplified production system is as shown below. The
production system has the following characteristics:

1. Production is an organized activity, so every production system has an objective.

2. The system transforms the various inputs to useful outputs.
3. It does not operate in isolation from the other organization system.
4. There exists a feedback about the activities, which is essential to control and improve
system performance.

Schematic production system

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2.2 PRODUCT DESIGN AND PROCESS SELECTION

Product design process involves the steps of generating ideas, product screening, preliminary
design and final design:

1. Generating ideas:
Ideas of new products/Services should be sought from a variety of sources such as customer
voice, market research, Research and development department, competition and
technological developments. Benchmarking on how product can be improved against the best
in the market segment can also be used to make recommendations.
2. Product screening.
The process consists of market, economic and Technical analysis.
 Market Analysis
Consists of evaluating product concept with potential customers through interviews,
focus groups and data collection methods. Evaluation may be achieved by supplying a
product to the market for testing and receive feedback. Market analysis entails identifying

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 whether there is sufficient demand for the product and its fit with the marketing strategy
in place. At a strategic level use of product life cycle to determine costs and volumes of
product is utilised. The product life cycle describes product sales volumes over time.

 Strategies often tied to product life cycle

 Length of life cycles shrinking.
 Business strategy should match life cycles stages

Introduction:-In early introduction phase production costs are high and design changes
frequent. At this stage there is little or no competition so a premium price can be charged.
Growth: - This phase sees a rapid increase in volume and completion entering market. At
this stage it is important to establish product in the market as firmly as possible
(consolidation) to secure future sales. At this stage production costs decline as process
improvements and standardization takes place.
Maturity stage: - completion increases and it is important that sales are secured through
branded products to differentiate from cheap competition. There is need for continual
design improvements to both product/services and process. Some products such as
consumer goods may stay in mature stage indefinitely and techniques such as advertising
are used to maintain interests and market share.
Decline: - sales begin to diminish absolutely as the product is gradually edged out by
better products or substitutes.

Product Life Cycle Stages and Emphasis

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Economic analysis:
Consists of developing estimates of production and demand costs and comparing them with
demand estimates. This analysis requires an accurate estimate of demand derived from statistical
forecasts of the industry sales and estimates of market share product competes in. the estimates
will be based on predicted price ranges from product which is comparable with the position of
new product in the market. Techniques such as cost/ benefit analysis, decision theory and
accounting measures such as Net Present Value (NPV) and internal rate of return (IRR) may be
used to calculate profitability.

Assuming that all products made are sold the volume for a certain profit can be given by

( P+ FC)
X = SP−VC

Where X - Volume
P - Profit
FC - Fixed costs
SP - Selling price
VC - Variable costs
When profit, P = 0 (i.e. Selling costs = Production costs) that is break-even point (BP) then

FC
X = SP−VC

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Technical Analysis:
Consists of determining whether technical capacity to manufacture product. It covers such issues
like ensuring that materials are available to make products according to specification required,
ensuring that appropriate and adequate machinery and skills are available to convert materials
into finished products. It should also take into account target market so designers to consider cost
of manufacturing and distribution of product in order to sell product at a competitive price.
Strategic analysis involves ensuring that product provides a competitive edge for organisation,
drawing on its competitive strengths and compatible with core business.

3. Preliminary Design
Products concepts that pass feasibility stage enter preliminary design. A specification of
components of package requires a product/service structure which describes the relationship
between components and a bill of material or list of components quantities derived from
product structure. The process by which the package is created must also be specified in
terms of mapping out sequences of activities which are undertaken. Use of process flow
charts is important at this stage.

4. Final Design:-
Involves use of a prototype to test preliminary design until a final design is chosen. CAD and
simulation modelling can be used to construct a computer based prototype of product design.

Methods of Improving Product Design;

a) Design for Manufacture:
A concept which provides guidelines using techniques such as simplification,
standardisation and modularisation to ensure that product design can be produced easily
and at low cost.
Simplification:- Involves reducing number of components in design in order to reduce
costs and increase reliability.
Standardisation:- Involves using components that can be used in a number of products
again reducing costs through economies of scale and minimising inventory.
Modularisation:- Involves using modules or blocks of components that are standard
across products reducing costs and increasing reliability.

b) Concurrent Engineering:
Contribute to the design effort provides work throughout the design process as a team.
This reduces design lead times.

2.3 PROCESS SELECTION

When considering product design the issue of the design of the process that is needed and used to
produce that design/product should also be considered. It differs from organisation to
organisation and is related to volume and variety of demand from product in market. In order to

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assist in selection of a process, process designs can be categorised under 5 types namely project,
Job shop, batch, mass and continuous/flow.

Classification of production systems

Sequence of operations in the manufacturing process is determined by

a) Nature of product.
b) Material used.
c) Quantities produced.
d) Existing physical layout of plant.

Process selection procedure:

a) Selection of process:
 For converting raw materials to finished products.
 Selecting most economic process. Selection depends on current production
commitments, delivery dates, quantity to be produced and quality standard.
b) Selection of materials.
 Purchase correct shape and sizes to reduce scrap.
 Right quality as per given specification.

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 c) Selection of jigs, fixtures and special attachments.
 Support devices for high production rates.
 To reduce cost of production.
d) Selection of cutting tools and Inspection gauges
 To reduce production times.
 Separate tools for initial course machining and for fine finishing.
 Accurate inspection at faster rates.
 Find setup time and standard times for each operation.

Factors affecting process design.

 Nature of product/service demand.

 Degree of automation.
 Degree of vertical integration.
 Level of product/service quality.
 Product/service and volume flexibility.
 Degree of customer contact.
 Equipment available or that can be procured for the job.

Types of process design:

The basic type of production system and finished goods inventory policy to be used must be
decided at the earliest stages of process planning. The common type of production systems are.

i. Product-focused production system

ii. Process – focused production system.
iii. Group- Technology/cellular manufacturing systems.
iv. Fixed position

2.4 PRODUCTION MANAGEMENT

Production management is a process of planning, organizing, directing and controlling the
activities of the production function. It combines and transforms various resources used in the
production subsystem of the organization into value added product in a controlled manner as per
the policies of the organization.
E.S. Buffa defines production management as, “Production management deals with decision
making related to production processes so that the resulting goods or services are produced
according to specifications, in the amount and by the schedule demanded and out of minimum
cost.”

OBJECTIVES OF PRODUCTION MANAGEMENT:

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The objective of the production management is ‘to produce goods services of right quality and
quantity at the right time and right manufacturing cost’.

1. Right quality
The quality of product is established based upon the customers’ needs. The right quality is not
necessarily best quality. It is determined by the cost of the product and the technical
characteristics as suited to the specific requirements.

2. Right quantity
The manufacturing organization should produce the products in right number. If they are
produced in excess of demand the capital will block up in the form of inventory and if the
quantity is produced in short of demand, leads to shortage of products.

3. Right time.
Timeliness of delivery is one of the important parameter to judge the effectiveness of production
department. So, the production department has to make the optimal utilization of input resources
to achieve its objective.

4. Right manufacturing cost.

Manufacturing costs are established before the product is actually manufactured. Hence, all
attempts should be made to produce the products at pre-established cost, so as to reduce the
variation between actual and the standard (pre-established) cost.

Operating System:

Operating system converts inputs in order to provide outputs which are required by a customer. It
converts physical resources into outputs, the function of which is to satisfy customer wants i.e., to provide
some utility for the customer. In some of the organization the product is a physical good (hotels) while in
others it is a service (hospitals). Bus and taxi services, tailors, hospital and builders are the examples of an
operating system.

Everett E. Adam & Ronald J. Ebert define operating system as, “ The part of an organization that
produces the organization’s physical goods and services.”

Ray Wild defines operating system as, “A configuration of resources combined for the provision of goods
or services.”

Concept of Operations
An operation is defined in terms of the mission it serves for the organization, technology it
employs and the human and managerial processes it involves. Operations in an organization can
be categorised into manufacturing operations and service operations. Manufacturing operations
is a conversion process that includes manufacturing yields a tangible output: a product, whereas,
a conversion process that includes service yields an intangible output: a deed, a performance, an
effort.

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2.5 SCOPE OF PRODUCTION AND OPERATIONS MANAGEMENT

Production and operations management is concern with the conversion of inputs into outputs,
using physical resources, so as to provide the desired utilities to the customer while meeting the
other organizational objectives of effectiveness, efficiency and adoptability. It distinguishes itself
from other functions such as personnel, marketing, finance, etc., by its primary concern for
‘conversion by using physical resources.’ Following are the activities which are listed under
production and operations management functions:
1. Location of facilities
2. Plant layouts and material handling
3. Product design
4. Process design
5. Production and planning control
6. Quality control
7. Materials management
8. Maintenance management.

LOCATION OF FACILITIES
Location of facilities for operations is a long-term capacity decision which involves a long term
commitment about the geographically static factors that affect a business organization. It is an
important strategic level decision-making for an organization. It deals with the questions such as
‘where our main operations should be based?’ The selection of location is a key-decision as large
investment is made in building plant and machinery. An improper location of plant may lead to
waste of all the investments made in plant and machinery equipment. Hence, location of plant
should be based on the company’s expansion plan and policy, diversification plan for the
products, changing sources of raw materials and many other factors. The purpose of the location
study is to find the optimal location that will results in the greatest advantage to the organization .

PLANT LAYOUT AND MATERIAL HANDLING

Plant layout refers to the physical arrangement of facilities. It is the configuration of
departments, work centres and equipment in the conversion process. The overall objective of the
plant layout is to design a physical arrangement that meets the required output quality and
quantity most economically.

According to James Moore, “Plant layout is a plan of an optimum arrangement of facilities

including personnel, operating equipment, storage space, material handling equipments and all
other supporting services along with the design of best structure to contain all these facilities”.

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‘Material Handling’ refers to the ‘moving of materials from the store room to the machine and
from one machine to the next during the process of manufacture’. It is also defined as the ‘art
and science of moving, packing and storing of products in any form’. It is a specialised activity
for a modern manufacturing concern, with 50 to 75% of the cost of production. This cost can be
reduced by proper section, operation and maintenance of material handling devices. Material
handling devices increases the output, improves quality, speeds up the deliveries and decreases
the cost of production. Hence, material handling is a prime consideration in the designing new
plant and several existing plants.

PRODUCT DESIGN
Product design deals with conversion of ideas into reality. Every business organization have to
design, develop and introduce new products as a survival and growth strategy. Developing the
new products and launching them in the market is the biggest challenge faced by the
organizations. The entire process of need identification to physical manufactures of product
involves three functions: marketing, product development, and manufacturing. Product
development translates the needs of customers given by marketing into technical specifications
and designing the various features into the product to these specifications. Manufacturing has the
responsibility of selecting the processes by which the product can be manufactured. Product
design and development provides link between marketing, customer needs and expectations and
the activities required to manufacture the product.

PROCESS DESIGN
Process design is a macroscopic decision-making of an overall process route for converting the
raw material into finished goods. These decisions encompass the selection of a process, choice of
technology, process flow analysis and layout of the facilities. Hence, the important decisions in
process design are to analyse the workflow for converting raw material into finished product and
to select the workstation for each included in the workflow.

PRODUCTION PLANNING AND CONTROL

Production planning and control can be defined as the process of planning the production in
advance,
setting the exact route of each item, fixing the starting and finishing dates for each item, to give
production orders to shops and to follow up the progress of products according to orders. The
principle of production planning and control lies in the statement ‘First Plan Your Work and then
Work on Your Plan’. Main functions of production planning and control includes planning,
routing, scheduling, dispatching and follow-up.

 Planning is deciding in advance what to do, how to do it, when to do it and who is to do
it. Planning bridges the gap from where we are, to where we want to go. It makes it
possible for things to occur which would not otherwise happen.

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  Routing may be defined as the selection of path which each part of the product will
follow, which being transformed from raw material to finished products. Routing
determines the most advantageous path to be followed from department to department
and machine to machine till raw material gets its final shape.
 Scheduling determines the programme for the operations. Scheduling may be defined as
‘the fixation of time and date for each operation’ as well as it determines the sequence of
operations to be followed.

Fig.Scope of production and operation management.

2.6 PRODUCTION MANAGEMENT VS. OPERATIONS MANAGEMENT

Production and Operations Management are so closely intertwined, that it is quite difficult to
differentiate the two. Production management covers administer all the activities which are
involved in the process of production. On the other hand, operations management entails all the
activities involved in the production of goods and delivery of services such as material
management, quality management, maintenance management, process management, process
design and so on.

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3 OPERATIONS MANAGEMENT STRATEGY

3.0 What is Strategy?

A set of well-defined objectives, plans, and policies for the organization to successfully compete
in its markets both domestic and global or,

Strategy can be defined as follows (Johnson et al., 2008)

‘Strategy is the direction and scope of an organisation over the long term: ideally, which matches
its resources to its changing environment and in particular its markets, Customers or clients so as
to meet stakeholder expectations

The business strategy needs to be divided into functional strategies, throughout the organization,
that are aligned and support the overall business strategy .Strategy can be seen to exist at 3 main
levels of corporate, business and functional:

i. Corporate level Strategy

At the highest or corporate level the strategy provides long-range guidance for the whole
organisation – What business should we be in?.
ii. Business Level Strategy
Here the concern is with the products and services that should be offered in the market
defined at the corporate level – How do we compete in this business?
iii. Functional Level Strategy
This is where the functions of the business (e.g. operations, marketing, finance) make
long-range plans which support the competitive advantage being pursued by the business
strategy- How does the function contribute to the business strategy.

3.1 What is 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. Operations strategy specifies the policies and plans for using
the organization’s resources to support its long-term competitive strategy the Figure below
shows this relationship.

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Remember that the operations function is responsible for managing the resources needed to
produce the company’s products or services. Operations strategy is the plan that specifies the
design and use of these resources to support the business strategy. This includes the location,
size, and type of facilities available; worker skills and talents required; use of technology, special
processes needed, special equipment; and quality control methods. It is the role of operations
strategy to provide an overall plan for the use of all these resources. The operations strategy must
be aligned with the business strategy.
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. Otherwise, each person in the company would pursue goals
that he or she considered important, and the company would quickly fall apart. The functioning
of a football team on the field is similar to the functioning of a business and provides a good
example of the importance of a plan or vision. Before the plays are made, the team prepares a
game strategy. Each player must perform a particular role on the team to support this strategy.
The strategy is a “game plan” designed so that the team can win. Imagine what would occur if
individual players decided to do plays that they thought were appropriate. Certainly the team’s
chance of winning would not be very high. A successful football team is a unified group of
players using their individual skills in support of a winning strategy. The same is true of a
business. The long-range plan of a business is called the business strategy. The role of each of
the individual business functions, such as operations, finance, and marketing, is to find ways to
best support the business strategy. Just as the players on a football team support then team’s
strategy, the role of everyone in the company is to do his or her job in a way that supports the
business strategy. In today’s highly competitive, Internet based, and global marketplace, it is
more important than ever for companies to have a clear plan for achieving their goals. In this
chapter we discuss the role of operations strategy, its relationship with the business strategy, and

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the ways in which the operations function can best support the business strategy. Because
strategy is about competitiveness, we will also learn ways to measure the competitiveness of a
business by measuring its productivity. Harvard Business School professor Michael Porter says
that companies often do not understand the differences between operational effectiveness and
strategy. Operational effectiveness is the ability to perform operations tasks more efficiently than
competitors. Strategy, on the other hand, is a plan for competing in the marketplace. Running a
race very efficiently is an example of operational effectiveness.

Now that we know the meaning of business strategy and operations strategy and their
importance, let’s look at how a company would go about developing a business strategy. Then
we will see how an operations strategy would be developed to support the company’s business
strategy. A company’s business strategy is developed after its managers have considered many
factors and 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 business strategy. In this section, we describe each of these factors in detail and show
how they are combined to formulate the business strategy.

3.2 Business strategy

Categories of Business Strategies

a) First-to-Market Strategy
 Products available before competition.
 Strong applied research capability needed.
 Can set high price to skim market or set lower price to gain market share.
b) Second-to-Market Strategy
 Quick imitation of first-to-market companies
 Less emphasis on applied research and more emphasis on development
 Learn from first-to-market’s mistakes
c) Cost Minimization or Late-to-Market Strategy.
 Wait until market becomes standardized and large volumes demanded
 Compete on basis of costs instead of product features
 Research efforts focus on process development versus product development
d) Market Segmentation
 Serving niche markets
 Applied engineering skills and flexible manufacturing processes needed

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1. Vision statements used to express organization’s values and aspirations.

2. Mission statements express organization’s purpose or reason for existence

(A statement defining what business an organization is in, who its customers are, and how its
core beliefs shape its business.).

The first decision a company needs to make is to identify its mission. Every organization, must
have 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, etc.”)?
 Who will the customers be, and what are the expected customers attributes
(“homeowners,” “college graduates, etc.”)?
 How will the company’s basic beliefs define the business (“gives the highest customer
service,” “stresses family values”)?

Examples of some well-known companies and parts of their mission statements:

Dell Computer Corporation: “to be the most successful computer company in the world”
Delta Airlines: “worldwide airlines choice”

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IBM: “translate advanced technologies into values for our customers as the world’s largest
information service company”
Lowe’s: “helping customers build, improve and enjoy their homes”
Ryder: “offers a wide array of logistics services, such as distribution management, domestically
and globally”

The mission basically defines the company. In order to develop a long-term plan for a business,
you must first know exactly what business you are in, what customers you are serving, and what
your company’s values are. If a company does not have a well-defined mission it may pursue
business opportunities about which it has no real knowledge or that are in conflict with its
current pursuits, or it may miss opportunities altogether

3. Environmental Scanning
(Monitoring the external environment for changes and trends in the market, in the economic and
political environment, and in society in order to determine business opportunities and threats).
SWOT analysis.
A second factor that must be considered when developing a business strategy is the external
environment in which the business is operating. This environment includes trends in the market,
in the economic and political environment, and in society. These trends must be analyzed to
determine business opportunities and threats. This process of monitoring the external
environment is called environmental scanning. To remain competitive, companies have to
continuously monitor their environment and be prepared to change their business strategy, or
long-range plan, in light of environmental Changes.

What Does Environmental Scanning Tell Us? Environmental scanning allows a company to
identify opportunities and threats. For example, through environmental scanning we could see
gaps in what customers need and what competitors are doing to meet those needs. A study of
these gaps could reveal an opportunity for our company, and we could design a plan to take
advantage of it. On the other hand, our company may currently be a leader in its industry, but
environmental scanning could reveal competitors that are meeting customer needs better—for
example, by offering a wider array of services. In this case, environmental scanning would reveal
a threat and we would have to change our strategy so as not to be left behind. Just because a
company is an industry leader today, does not mean they will continue to be a leader in the
future.

What Do We Mean by Trends in the Environment? The external business environment is always
changing. To stay ahead of the competition, a company must constantly look out for trends or
changing patterns in the environment, such as marketplace trends. These might include changes
in customer wants and expectations, and ways in which competitors are meeting those
expectations. For example, in the computer industry customers are demanding speed of delivery,
high quality, and low price. Dell Computer Corporation has become a leader in the industry

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because of its speed of delivery and low price. Other computer giants, such as Compaq, have had
to redesign their business and operations strategies to compete with Dell. Otherwise, they would
be left behind. It is through environmental scanning that companies like Compaq can see trends
in the market, analyze the competition, and recognize what they need to do to remain
competitive. There are many other types of trends in the marketplace. For example, we are
seeing changes in the use of technology, such as point-of-scale scanners, automation, computer-
assisted processing, electronic purchasing, and electronic order tracking. One rapidly growing
trend is e-commerce., e-commerce has become a significant part of business eBay, alibaba. In
addition to market trends, 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.
Suppose that a company is considering obtaining a loan in order to purchase a new facility.
Environmental scanning could show that interest rates are particularly favourable and that this
may be a good time to go ahead with the purchase.
Political trends include changes in the political climate—local, national, and international— that
could affect a company. For example, the creation of the European Union has had a significant
impact on strategic planning for global companies such as IBM, Hewlett Packard, and PepsiCo.
Similarly, changes in trade relations with China have opened up opportunities that were not
available earlier. There has been a change in how companies view their environment—a shift
from a national to a global perspective. Companies seek customers and suppliers all over the
globe. Many have changed their strategies in order to take advantage of global opportunities,
such as forming partnerships with international firms, called strategic alliances. For example,
companies like Motorola and Xerox want to take advantage of opportunities in China and are
developing strategic alliances to help them break into that market. Finally,

Social trends are changes in society that can have an impact on a business. An example is the
awareness of the dangers of smoking, which has made smoking less socially acceptable. This
trend has had a huge impact on companies in the tobacco industry. In order to survive, many of
these companies have changed their strategy to focus on customers overseas where smoking is
still socially acceptable, or have diversified into other product lines.

4. Core Competencies
(The unique strengths of abusiness).
The third factor that helps define a business strategy is an understanding of the company’s
strengths. These are called core competencies. In order to formulate a long term plan, the
company’s managers must know the competencies of their organization. Core competencies
could include special skills of workers, such as expertise in providing customized services or
knowledge of information technology. Another example might be flexible facilities that can
handle the production of a wide array of products. To be successful, a company must compete in
markets where its core competencies will help it win.

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Organizational Core Competencies

1. Workforce  Highly trained.

 Responsive in meeting customer
needs
 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

Highly successful firms develop a business strategy that takes advantage of their core
competencies or strengths. To see why it is important to use core competencies, think of a
student developing plans for a successful professional career. Let’s say that this student is
particularly good at mathematics but not as good in verbal communication and persuasion.
Taking advantage of core competencies would mean developing a career strategy in which the
student’s strengths could provide an advantage, such as engineering or computer science. On the
other hand, pursuing a career in marketing would place the student at a disadvantage because of
a relative lack of skills in persuasion.

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