Strategic Planning and Decisions

in Operations/Organizations
Operation Strategies
http://wps.pearsoned.co.uk
 Porter’s Generic strategies
• Porter (1980) classifies three generic
strategies:
1. Overall Cost Leadership
2. Differentiation
3. Focus.
 Overall Cost Leadership
• Low cost
• High product availability
• Usually off the shelf
 Differentiation
• High quality
• Innovative in product design
• Flexible
 Focus
• Market segmentation – in terms of meeting
the special needs of a particular market ,
providing lower costs for that market segment
, or both.
• While the overall cost leadership and
differentiation are industry wide strategies ,
but market segmentation by definition applies
to only a portion of the market
• Only one of these strategies is usually
employed by a particular business unit;
however , different strategies can and should
be employed by different business units within
the same company.
 Overall cost leadership
• This strategy requires the concentration of the
operations system on all the elements of system
design that make low cost possible.
• In line operations, fabrication and assembly lines;
equipment dedicated to a restricted mix of products,
capital intensity in the form of specialized
equipment , mechanization , automation , and
robotics , all especially designed for the specific
operations problem; and commonly specialized and
narrowly defined job designs.
• Usually the cost leadership strategy also
involves production to stock since part of the
strategy is to make the product available off
the shelf.
• Economies of scale are used
• Learning and experience curve are used
• Low cost and product availability drives the
entire strategy./entire organization.
• Quality , service and flexibility are not ignored;
however they are not the emphasis
• Low cost strategy provides an entry barrier in
terms of economies of scale and cost
advantages.
• Even product substitutes have a more difficult
task in competing because of low cost and
availability.
• Provides bargaining power in relation to
potential vertical integration of both supplier
and buyer for the efficient producer in
comparison to less efficient producer.
• E.g: kodak – photographic film; Texas
Instruments – silicon chips;
 Risks of cost leadership
• Production system becomes inflexible
• If consumer preference take a sharp turn or if
technology changes product design – the plant
, equipment obsolete the enterprise may have
to reinvest huge sums in order to recover.
(ford car – once the least cost producer – not
able to cope up changed environment )
 Differentiation
• The firm attempts to differentiate itself from
the pack by offering something that is perceived
by the industry (and its customers) as being
unique.
• Could be high quality (rolls royce/benz) ,
innovation (hewlet packard) or willingness to be
flexible in product designs (ferrari).
• The above has implication on production
system design.
• The requirement is to be flexible in order to cope with
the demands on the system.
• Brand image is important in this strategy.
• Other ways to differentiate your self is also possible – a
strong dealer network (zenith),
an extremely well designed distribution system
(Gillette). Or excellent service.
This strategy also does not ignore cost just as cost
leadership does not ignore quality , but the thrust is on
differentiation/uniqueness.
 Advantages - differentiation
• Comparatively less competition – both direct as
well as from substitutes –
• Customers have brand loyalty, and therefore less
sensitive to price
• draws higher margins – so higher costs are less
important
• Barriers to entry are there.
• Less threat from suppliers forward integration
due to higher margins.
 Risks - differentiation
• Customers can tolerate only a limited
premium.
• If costs of providing uniqueness become more
and beyond the customers willingness to pay ,
then this turns into disadvanatage
• New technology can through the product out
of market
 Market segmentation-Focus
• Not industry wide – only a select customer
group is focused
• Either low cost or uniqueness
• Niche market by providing a good service.
• Manufacturing facilities must be flexible to
handle all types , sizes and volume.
• Likely to have weakness financially to take on
giants.
 Experience curve
• It is an established fact in manufacturing that ,
as experience is gained through production, unit
costs are reduced.
• Originally , this cost improvement was attributed
to a learning effect among workers such as the
division of labor effect noted by Adam Smith
(development of skill when a single task is done
repetitively ), now however it is recognized as
resulting from a wide variety of factors such as
• Such as changes in production methods and
tools , improved product design from the
point of producibility , standardization,
changes in layout, and improved flow ,
economies of scale , better inventory control,
improved scheduling and plant utilization and
improvements in organizations.
• It is also called learning curve.
• Noticed first in aircraft industry – study
revealed that each doubling of cumulative
total output – unit costs reduced by 20%.
• Thus the second unit costs only 80%, fourth
unit , costs 80% of second , the hundredth unit
costs 80% of the fifth and so on.
Economies and Diseconomies of Scale
Figure 4.2

Copyright © Houghton Mifflin Company. All

4 | 20
rights reserved.
 Learning Effects
Learning Effects are cost savings that come from
learning by doing.
• Labor productivity
Learn by repetition how to best carry out the task
• Management efficiency
Learn over time how to best run the operation
• Realization of learning effects implies a
downward shift of the entire unit cost curve
As labor and management become more efficient over
time at every level of output

Copyright © Houghton Mifflin Company. All

4 | 21
rights reserved.
The Impact of Learning and Scale
Economies on Unit Costs
Figure 4.3

Copyright © Houghton Mifflin Company. All

4 | 22
rights reserved.
 The Experience Curve
The Experience Curve is the systematic lowering of the
cost structure and consequent unit cost reductions
that occur over the life of a product

Strategic significance of the experience curve:

Increasing a company’s product volume and
market share will lower its cost structure
relative to its rivals.

Copyright © Houghton Mifflin Company. All

4 | 23
rights reserved.
The Experience Curve
Figure 4.4

Copyright © Houghton Mifflin Company. All

4 | 24
rights reserved.
 Flexible Manufacturing
and Mass Customization
• Flexible Manufacturing Technology
“Lean Production” technology that:
• Reduces setup times for complex equipment
• Improves scheduling to increase use of
individual machines
• Improves quality control at all stages of the
manufacturing process
• Increases efficiency and lowers unit costs
• Mass Customization
Ability to use flexible manufacturing technology to
reconcile two goals that were once thought incompatible:
• Low cost and
• Differentiation through product customization
Copyright © Houghton Mifflin Company. All
4 | 25
rights reserved.
Tradeoff Between Costs and Product
Variety
Figure 4.5

Copyright © Houghton Mifflin Company. All

4 | 26
rights reserved.
• Experience curve is particularly important in
productivity improvement results during rapid
development and mature phases of the product
life cycle, usually when the system is product
focused.
1. First the firm that has the largest market share will
produce the largest number of units and hence will
have the lowest cost.( even when all the firms have
the same percentage of experience curve)
2. Second , if through process technology
advantages a firm can establish itself on a
lower percentage experience than
competitor , it will have lower unit costs, even
if both the firms have the same cumulative
output.
3. Third a firm with greater experience can use
aggressive price policy as a competitive
weapon to gain an even greater market share .
4. Fourth , a firm can use aggressive process technology policy by
allocating resources towards mechanization in earlier stages and
automation in latter stages of growth to maintain its position on
the experience curve or to improve the slope of its experience
curve.
This strategy is particularly important in the mature phase of
product life cycle where competition is focused on cost.
But, the limitation of this experience curve is that benefits finally
run out simply because of product obsolescence as indicated by
the product life cycle curve. ( as even before maturity is reached
cost reductions due to experience curve will provide smaller and
smaller returns)
 Role of productivity improvement
• In order to remain competitive , a firm must
continually seek ways of reducing costs;
• It is largely through operations strategy that
productivity improvement becomes
implemented.
 The six basic components of operations
strategy
• All of the activities in the line of material flow
from suppliers through fabrication and assembly
and culminating in product distribution must be
integrated for sensible operations strategy
formulation .
• Leaving any part out can lead to uncoordinated
strategies. In addition to materials , the other
crucial inputs of labor, job design and technology
part must be parts of operations strategy.
• The six components of operations strategy
are;
1. Positioning the productive system
2. Capacity /location decisions
3. Product and process technology
4. Workforce and job design
5. Strategic implications of operating decisions
6. Suppliers and vertical integration
• These components are basic to operations
strategy because there is a wide managerial
choice available within each and each affects
the long term competitive position of the firm
by impacting cost , quality , product
availability and flexibility/service.
 1.Positioning the productive system
• If the production is not made a part of corporate strategy,
then the likely hood of mismatch between system and
market is high with resulting conflicts, usually between
production and marketing functions.
• A firm without a unified strategy that includes the
operations function is likely to anticipate obtaining low
cost, high quality, product availability and
flexibility/service from its production system all at the
same time , not realizing that there are trade offs
between them and one can not optimize all these
dimensions simultaneously.
• A firm that is attempts to be “all things” in its
production system is likely to compromise all
four dimension of production competence and
end up “stuck in the middle” with low
margins.
 Product Process Strategies
• As the product develops through its life cycle , the
production system goes through a life cycle of its
own, from a job shop system (product focused , to
order) when the product is in its initial stages
through intermediate stages to a continuous
system (product focused, to stock) when the
product is demanded in larger volume.
• These stages of product and process development
are interdependent and feed on each other
• Page 735 – buffa book figure 22.4
• Where managers strategy is focused on
providing service, high quality and meeting
customers individual needs, combinations
between product volume and productive
system types are below the line ( in figure
given) may be appropriate.
• Probably combined with production to order.
• On the other hand if the managers strategy is
focused on price and off the shelf availability ,
combinations above the line (in figure given)
may be appropriate, combined with a “to
stock “production system.
• Examples of Joint strategies – Lynchburg
Foundry having five different Plants in Virginia
and surrounding areas.
• Again a strategy can never remain static over
long periods.
• As products or services mature in their life
cycles , consumer preferences become
known , design become refined and volumes
build and the appropriate joint strategies must
reflect these changes.
 Focus
• The example of Lynchburg foundry each plant
focusing on different customer groups can be an
example - “the focused factory” – “specialized”
factory.
• To summarize all the elements of operations
strategy are important and all need to be woven
together to form a coordinated strategy, if the
positioning of the system is wrong , the operations
strategy will be ineffective. “Positioning is the Key”.
Making Capacity/Location Decisions strategic

• Videotape prices in the USA and elsewhere began to

decline rapidly in 1982 when Fuji photo film , Hitachi
Maxell and TDK collectively increased capacity by
over 90% . This massive increase incapacity was
installed just as industry wide annual growth rates in
sales declined to a relatively modest 40%. While
consumers benefitted out of low prices , the supply
demand imbalance created havoc in industry and it
was expected that the over capacity would not be
absorbed for at least next two years.
• Maruthi is putting up a Plant in Manesar with
a capacity to produce another2,50,000 cars in
the same existing campus.
• For whom is this message directed at ?

• Discuss Gujarath Ambuja Cement Case study

• In March 1983, Domitar Incorporated , Canada’s
largest maker of fine papers announced that it
would double the capacity of its paper mill in
Windsor , Quebec. The announcement was quite
factual , but it indicated that the mill to be enlarged
was operating at loss. In addition the announcement
stated that the mill benefits however from a good
wood supply and is near the U S Border for increased
access to that market. It provides the best location
for significant increases in productive capacity.
• The above announcement suggests the
importance of capacity/location decisions.
• Has an impact on the amount of capital being
spent and has strategic importance.
• Risks are great because future demand is
uncertain.
• Competitors behaviour is equally important.
• For example if too many competitors add
capacity , all the firms in the industry will suffer.
• Once installed new capacity remains and the
over capacity will be a problem in future.
• Where to expand , how to counter competitors
moves?
• How to tie the new capacity to the distributors
network effectively.
• Excess capacity is a curse, except where
explosively increasing demand is certain.

• New technologies come which can lower the

cost.
• If exit barriers are high , the existing
technology is likely to remain in production
and prolong the agony of over capacity.
 Work force and job design
• There is a strong tie between the work force and
job design and operations strategy.
• Labour is the key input to all dimensions of
production system ; cost , quality, dependability
and flexibility in service.
• Labor – management relationship is extremely
important in operations strategy.
• Employment in manufacturing will decline in the
next 10 – 20 years , but still an important input.
 Making operating decisions strategic
• Japanese have taught the world that creating effective
operating system is having a significant impact on cost
and quality.
• JIT production- small lot sizes – worker produces and
passes it on to second worker. Second worker reports on
the defect immediately. First worker is motivated to
discover the cause and further scrap accumulation is
avoided. Each pair of operation is highly linked and
awareness of interdependence of two workers is
enhanced. Constant improvements improves quality and
reduces cost.
 Strategies regarding suppliers and vertical
integration
• Supplier relatioship – arms length (usa) – close
(japan)- keiretsu/jit
• Since supplier processes are really an
extension of manufacturing process the
question of whether or not to integrate
backwards and producing the component in
house is to be considered.
• The wheel of operations strategy to be
inserted.
 implementation
• Developing SBU Plans for operations: 4 steps;
1. Analyze the situation – the operations audit.
2. Develop strategic alternatives
3. Select a strategy in harmony with the
enterprise strategy.
4. Formulate detailed plans and budgets to
implement the strategy.
• The purpose of audit is to take stock of the situation
of the operations function.
• Status on six basics of operations strategy
1. Positioning
2. Process flow and technology
3. Capacity / location decisions
4. Workforce and job design
5. Operating decisions
6. Suppliers and vertical integration.
• Assign priority weights
• Develop strategic alternatives
• Revise the planned levels in view of findings
• Select a strategy
• Implement the strategy
• Operations strategy is also concerned with
setting broad policies and plans for using the
resources of a firm to best support its long term
strategy.
• It has to be aligned with firms corporate
strategy.
• Operations strategy pertains to decisions that
relate to the design of a process , and the
infrastructure needed to support the process.
• The process design includes the selection of
appropriate technology , sizing the process
over time , the role of inventory in the process
and locating the process. The decisions also
cover logic associated with the planning , and
control system , quality assurance and control
approaches, work payment structures and
organization of operational function and in
alignment with changing customer needs.
 Competitive dimensions
• Which product or service to produce?
• Cost / price
• Quality / differentiation/service
• Delivery speed
• Delivery reliability
• Coping with change in demand/dynamic market
• Flexibility and speed of introduction of new
product .
 Other product specific criteria
• Technical liaison and support
• Meeting a launch date
• Supplier after sale support
• Other dimensions like color available/size
weight , location of site , customization
available and product mix options.
 Trade offs
• Concept of trade off among its various
strategies which are required to be aligned with
the firms competitive strategy.
• Straddling - a firm trying to match the benefits
of a successful position while maintaining its
existing position. E.g; continental airlines
failure.when it is already succesful as a full
service airline – tried in point to point routes of
its rival – ending up as a failure.
• Order winners Vs order qualifiers.
• Strategic fit
• Productivity measurement measures.