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Strategic Planning and Decisions in Operations (1) .PPTX Session 2
Strategic Planning and Decisions in Operations (1) .PPTX Session 2
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