CHAPTER Two

Operations Strategy
and Competitiveness

What is the use of running if you are not on the right track?
German proverb
 Learning objectives

• Define the business and operations strategy

• Explain the role of operations strategy in the organizations

and the relationship between operations strategy and
business strategy

• Explain the approaches in developing the operations

strategy

• Define the concept of productivity and the productivity

measures and computer the productivity measurements
Key terms

• Business strategy

• Mission vs vision

• Situational analysis

• Operations strategy

• Competitive priority

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 Mind gymnastic

• Assume XYZ company produces a given product which are similar to

others. Recently, the company has faced intensive competition in the
market. As a result, its is obvious that, it should design sound strategy
to compete and survive in the market. Please advice the company how
to be a competent in an operation.
Introduction

• Companies must be competent to sell their products and services.

• Competitiveness determines company’s

• Prospers

• Barely gets by/survive or

• Fails

• Thus, a strong strategy is required

 In today’s highly global market, companies should have strategic (long-
Introduction term) plans to gain and /or sustain for competitiveness.

• Strategy is the most-used terminology in business

• It is derived from a Greek word ‘Strategos’ – leading an army in order to achieve

a specific aim by using the resources.

• What makes the military and business similar?

Business Strategy: A long-
• Have objectives range plan for a business

• Focus on long-term and on big-picture approach

• Maximize the utilization of resources etc

• Strategy is a long term decisions that shape the direction of the organizations.
 Introduction … Hierarchy of strategy

• Overall Direction of Company and Management of Its

Businesses Corporate strategy

• Competitive and Cooperative Strategies

Business strategy

• Maximize Resource Productivity Functional

strategy

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…
• Business strategy is based on the strategic decisions of managers who are
responsible for considering many factors.

• These decisions include

(1) defining a mission,

(2) making environmental scanning, and

(3) identifying and developing the company’s core competencies which are also
called as the company’s strength –

• are vital for the business strategy

 Three Inputs to a Business Strategy
Mission
Environmental scanning
• Statement that defines Core competencies
• Monitoring the business
what’s our business; • Unique strengths that
environment for market
what are our clients; can help us win in the
trends, threats, and
and how our values market
opportunities
define our business

Business strategy
• Defines the long-range
plan for the company

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Mission
• Is the reason or purpose of its existence

• Mission statement basically has to answer three basic questions which draw the
boundaries and focus of the organization

1. What will be the business of the company?

2. Who are the consumers and what are their known habits for buying?

3. How will the company contribute to the business?

Environmental scanning
• Environmental scanning is the process of monitoring the environment in which the
company operates.

• In the process of scanning the external environment, managers are monitoring the
trends in the market, industry, and society for opportunities and threats.

• In order to have and/or maintain a competitive advantage, companies need an

environmental scanning process.

• Both micro and macro environmental analysis

Core competencies
• The third important factor is to understand the company’s strengths. Includes

• Workers

• Facilities

• Market and financial know-how

• System and technology

SWOT Analysis
• In order to formulate an effective strategy, companies need to make a situational
analysis that examines the internal and external environment of the company.

• i.e. considering those factors that have both positive and negative impact
Operations strategy and the relationship between
operations strategy and business strategy
• Business strategy provides a broad scope for the entire organization which
provides an overall direction for the organization.

• Operations strategy has a narrow scope since it relates primarily to the operations
of an organization

• Once a business strategy has been developed, an operations strategy must be

formulated.
…..
• Operations strategy could be defined as a plan that is designed for operations
function that supports the business strategy .

• The term ‘operations strategy’ sounds at first like ‘operational’ which emphasize
day-to-day activities while ‘strategy’ is usually regarded as the opposite of daily
routine activities.

• But operations is not the same as ‘operational’, operations have a strategic role.

• Operations strategy deals with products, processes, methods, resources, quality,

cost, lead time and scheduling
The role of operations strategy in the
organizations
• Till 1980s the role of operations strategy was neglected by most of Western
companies

• Many managers didn’t have an operations background

• But the Japanese companies began offering low-cost and high-quality products,
they more emphasized on operations strategy

• M. Porter – companies often do not understand the differences between operations

efficiency and strategy
• Operations efficiency – is performing operations well when compared to the
competitors.

• a strategy is a plan for competing in the market.

• Operational efficiency and strategy must be linked; otherwise the company could
be very efficient but perform the wrong task.

• Operations strategy assures that all the tasks performed by the operations function
are the right tasks

.
 The relationship between operations strategy and
business strategy
• Operations strategy will improve their operations performance over time

• if operations are not aligned with overall strategy, companies competitiveness will
be poor .

• Therefore, In order to improve their operations performance and become directly

responsible for the competitiveness of the company, they need to undergo a series
of changes in their approach to operations strategy. Includes ….
1. Implementing business strategy

• Transitioning from implementing an operations strategy to actively supporting

it involves
• understanding company strategy,
• aligning operations goals,
• ensuring operations capabilities and
• facilitate strategic objectives.
2. Supporting business strategy

• To gain a competitive edge,

• companies must transition from supporting to driving roles in their
operations strategy,
• actively shaping it to identify opportunities for improvement and
innovation.
3. Driving business strategy

• Companies can enhance their

• operations performance and
• competitiveness by
• transitioning from implementing to supporting and
• driving operations strategy,
• requiring mastery in strategic thinking,
• process optimization, and
• change management.
The Contribution of Operations to Business Strategy: Hayes
and Wheelwright’s Four Stages of Contribution
Redefine Stage 4
industry Give an operations
expectation advantage
Increasing strategic impact

Clearly the Stage 3

best in the Link strategy with
industry operations

As good as Stage 2
competitors Adopt best practice

Stage 1
Holding the
orgns back Correct the worst
problems
Internally neutral Externally neutral Internally supportive Externally supportive

Increasing operations capabilities

 Stage 1: Internal Stage 2: External
neutrality neutrality
• The operations function's contribution • The operations function enters the
to competitive success is minimal, stage of external neutrality,
hindering the company's comparing itself to competitors'
competitiveness. performance to implement best

• The main goal is internal neutrality, practices.

aiming to avoid mistakes.

 Stage 3: Internally Stage 4: External
Supportive Supportive
• operations are focusing on achieving • Operations are considered externally
competitive and strategic goals, supportive, forecasting market and
developing appropriate resources, but supply changes to develop operations-
not the best in the market. based capabilities.
• This innovative, creative, and
proactive approach keeps the
company ahead of competitors.
 Perspectives on Operations strategy
• Though there are different perspectives on operations strategy, the common are

Top-down perspective Bottom-up perspective

Corporate Strategy ⇒ What the business want What d-2-d experience Operations Strategy ⇒
Business Strategy ⇒ operations to do suggests operations should do Business Strategy ⇒
Operations Strategy Corporate Strategy
Operations
strategy
Operations Resources
⇒ Market Requirements
Operations resources Market requirement
Important operations perspective perspective ⇒
resources ⇒ Operations Strategy
Operations Strategy
What operations resources can What the market requires
do operations to do

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• Suggests operations that
operations strategy is
developed for a
company’s competitive
strategy and supporting
its business strategy
• Aligns with stage 3 –
internally supportive .
What operations resources can
Top-down perspective Bottom-up perspective
What the business want What d-2-d experience
operations to do suggests operations should do
Operations
strategy
Operations resources Market requirement
perspective perspective
What the market requires
do operations to do
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 Top-down perspective Bottom-up perspective
What the business want What d-2-d experience
operations to do suggests operations should do
Operations
strategy
• involves an organization
• learning from its experiences,
• developing and enhancing its
operational capabilities, and
• incorporating ideas from daily
operations.

Operations resources Market requirement

perspective perspective
What operations resources can What the market requires
do operations to do

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 Top-down perspective Bottom-up perspective
What the business want What d-2-d experience
operations to do suggests operations should do

Operations
strategy

Operations resources Market requirement

perspective perspective
What operations resources can What the market requires
do operations to do

involves developing an operations

strategy to meet the organization's
operational performance
objectives, i.e. cost, quality, time,
and flexibility, as competitive
priorities.

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 Top-down perspective Bottom-up perspective
What the business want What d-2-d experience
operations to do suggests operations should do

Operations
strategy

Operations resources Market requirement

perspective perspective
What operations resources can What the market requires
do operations to do

suggests that operations strategy aligns

with the resource-based view (RBV) of
an organization, emphasizing the
importance of developing the
capabilities of operations resources for
strategic success.

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Developing an effective operations strategy
• Organizations assess operations strategy effectiveness based on customer value.

• To understand competitive position, operations managers develop close marketing

relations and decide on competitive priorities, including
• cost,

• quality,

• Delivery (time), and

• flexibility, as identified by Skinner (1969).

Competitive Priorities- The Edge
• Four Key Operations Questions:
Will you compete on –
Cost?
Quality?
Time?
Flexibility?
• All of the above? Some? Tradeoffs?

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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 uses product focused layouts
• Low cost does not mean low quality
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
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
 Trade-offs
• To achieve success, companies must prioritize their four
competitive priorities, allocate resources, and use the
"plant-within-a-plant" approach, allowing each plant to
focus on different priorities for different products.

• the need for trade-offs acknowledges that companies

have limited resources and need to make strategic
choices in order to optimize their operations and meet
the critical competitive priorities
Productivity
• The use of productivity as a measure of competitiveness is effective because it
allows companies to

• compare their performance against their competitors, and

• Identify areas where they can improve efficiency and effectiveness.

• It enables companies to track progress over time and identify trends in

performance.
Productivity…
• To improve productivity, companies need to focus on

• maximum utilization of their resources,

• reducing waste, and

• improving the quality of their products or services.

• The use of technology can also significantly improve productivity by automating

processes and reducing the need for manual labor.

• Effective workforce planning, training, and development can improve employee

performance and productivity
 Productivity

• Productivity

• A measure of the effective use of resources, usually

expressed as the Outputs
Productivity =
Inputs
 Productivity ratio measures

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 Example 1

• Three employees work for five days (8 working hours a day)

to produce 800 units, calculate the labor hour productivity

Given
Labour hr. productivity = 800units
3 employees x 40 hrs./employees = 120 hrs
6.67 units/hr.
 Example 2

• Determine the MFP for the combined input of labor and material
time using the following data:

• A team of workers make 500 units of a product having cost of ETB.

10 each. Actual cost is ETB.400 for labor and ETB. 2000 for material
& ETB. 500 for overheads, calculate the productivity
 Solution
Solution


 Example 3

What is the multifactor productivity “MFP”? if 7500

Units Produced and Sold for ETB10/unit with Cost of
labor - ETB10,000, Cost of materials- ETB5,000 and Cost of
overhead- ETB20,000.
 Class work

Bluewood Furniture produces average 35 chairs/day. Labor

costs average ETB480, material costs are typically ETB200,
and overhead cost is ETB250. Bluewood sells the chairs to a
retailer for ETB70/unit. Find multifactor productivity.

(70/chair x 35 chairs)/(480+200+250)
= (2450)/(930) or 2.63