Operations strategy

Lecture 5 (16-08-21)

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 Most businesses witnessing progressive normalisation: ITC
Chairman (04/09/20)
Mr. Sanjeev Puri

• While most businesses, apart from hotels and education and

stationery products, are witnessing “progressive
normalisation”, the spate of local lockdowns is impacting
recovery momentum, said Sanjiv Puri, Chairman and Managing
Director, ITC Ltd.
• According to him, although consumer trends remain
uncertain, the company will respond with agility to
strengthen its market standing. Corporates will have to gear
up for the ‘next normal’. Some of the existing consumer trends
will remain at an elevated level; certain segments are
witnessing a recovery: while new opportunities and industry
dynamics will get constantly redefined, he said.

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• Differentiated products and services that “can move from the
drawing board to the market in record speed”, building and
nurturing trusted brands, and supply chains that are “re-aligned
to react swiftly to disruptions” are key focuses, said Puri.
• Puri pointed out that demand for essential products in the food
and hygiene segments saw a surge. There is growing preference
for organic, naturals and fresh products. Consumers are also
seeking indulgence, comfort eating and even ‘revenge’
consumption. Frozen food and ready to eat/cook meals score
high on convenience, he added.

• Similarly, discretionary spends are down, and there’s evidence of

“value-seeking behaviour”. Shift to larger value packs with
infrequent shopping frequency and surge in digital shopping are
witnessed. Neighbourhood grocery stores have “emerged as the
lifeline for essential supplies”, said Puri.

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• ITC “rapidly introduced” over 40 first-to-market products, and fast-
tracked design, development and go-to-market strategies, said the ITC
chief.

• The Savlon portfolio was augmented (to include disinfectant sprays,

advanced Hexa sanitisers, soaps, bodywash, germ protection wipes,
etc); Nimwash for washing vegetables and fruits was introduced; B
Natural Plus immunity beverages were launched. The Bingo! snacks
range was ramped up, along with similar actions in other categories
like Master Chef (frozen foods) and Farmland (frozen vegetables).

• Innovative products are also being developed for a healthier lifestyle

and the company is working on “multiple value propositions” in areas
of functional foods and nutrition. These include developing products
with lower sodium and sugar, and fortifying offerings with value-
added nutrients like probiotics, prebiotics, fibres, nuts and seeds.

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• According to Puri, ITC is one of India's largest integrated agri business
enterprises with a segment revenue of over ₹10,200 crore. It sources
over 3 million tonnes of agri-products from 225 districts in 22 States
and is the largest private procurer of wheat.

• Farmer engagement is being stepped-up in wheat, potato, chillies and

fruits and vegetables (through the crop value chain cluster model).

• The company’s increasing engagement across the perishables value-

chain, including value-added products in frozen, purees and dehydrated
formats, will also spur investments in climate controlled infrastructure
and food processing space, said Puri.

• “The transformative agri reforms will also open up new opportunities…

and accelerate the journey towards future-ready value-added agri
products portfolio catering to both the B2B and B2C channels,”

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 Operations Strategy
Strategy Process
Example

Customer Needs More Product

Corporate Strategy Increase Org. Size

Operations Strategy Increase Production Capacity

Decisions on Processes
and Infrastructure Build New Factory

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 Corporate Strategy

• What businesses shall we be in?

• What businesses shall we acquire or divest?

• How do we allocate resources between businesses?

• What is the relationship between businesses?

• What is the relationship between the centre and the businesses?

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 Business Strategy

• How do we compete in this business?

• What is the mission of this business?

• What are the strategic objectives of this business?

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 Function Strategy

• How does the function contribute to the business strategy?

• What are the strategic objectives of the function?

• How are resources managed in the function?

• What technology do we use in the function?

• What skills are required by workers in the function?

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BCG Growth-share matrix

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BCG = Boston consultancy group
The BCG Growth-Share Matrix is a portfolio planning model developed by
Bruce Henderson of the Boston Consulting Group in the early 1970's.
•Company's business units can be classified into four categories based on
combinations of market growth and market share relative to the largest
competitor, hence the name "growth-share".

Market growth serves as a proxy for industry attractiveness, and

Relative market share serves as a proxy for competitive advantage.

•The growth-share matrix thus maps the business unit positions within these
two important determinants of profitability.

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Assumptions:
1. This framework assumes that an increase in relative market share will
result in an increase in the generation of cash.
 often is true because of the experience curve / learning curve and also due to
economies of scale;
 increased relative market share implies that the firm is moving forward on the experience
curve relative to its competitors, thus developing a cost advantage.

2. A second assumption is that a growing market requires investment in

assets to increase capacity and therefore results in the consumption of
cash.
 Thus the position of a business on the growth-share matrix provides an indication of its
cash generation and its cash consumption.
 Henderson reasoned that the cash required by rapidly growing business units could be
obtained from the firm's other business units that were at a more mature stage and
generating significant cash.
 By investing to become the market share leader in a rapidly growing market, the business
unit could move along the experience curve and develop a cost advantage. From this
reasoning, the BCG Growth-Share Matrix was born.

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Dogs - Have low market share and a low growth rate
 they neither generate nor consume a large amount of cash.
 However, dogs are cash traps because of the money tied up in a business that has
little potential.
 Such businesses are candidates for divestiture.
Question marks - Are growing rapidly and thus consume large amounts of cash,
 but because they have low market shares they do not generate much cash. The
result is a large net cash comsumption.
 A question mark (also known as a "problem child") has the potential to gain
market share and become a star, and eventually a cash cow when the market
growth slows.
 If the question mark does not succeed in becoming the market leader, then after
perhaps years of cash consumption it will degenerate into a dog when the market
growth declines.
 Question marks must be analyzed carefully in order to determine whether they
are worth the investment required to grow market share.
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Stars - generate large amounts of cash because of their strong relative market share,
 but also consume large amounts of cash because of their high growth rate; therefore the
cash in each direction approximately nets out.
 If a star can maintain its large market share, it will become a cash cow when the market
growth rate declines.
 The portfolio of a diversified company always should have stars that will become the
next cash cows and ensure future cash generation.
Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is
greater than the market growth rate, and thus generate more cash than they consume.
 Such business units should be "milked", extracting the profits and investing as little
cash as possible.
 Cash cows provide the cash required to turn question marks into market leaders, to
cover the administrative costs of the company, to fund research and development, to
service the corporate debt, and to pay dividends to shareholders.
 Because the cash cow generates a relatively stable cash flow, its value can be
determined with reasonable accuracy by calculating the present value of its cash stream
using a discounted cash flow analysis.

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• Under the growth-share matrix model, as an industry matures and its
growth rate declines, a business unit will become either a cash cow or a
dog, determined soley by whether it had become the market leader during
the period of high growth.
• While originally developed as a model for resource allocation among the
various business units in a corporation, the growth-share matrix also can be
used for resource allocation among products within a single business unit.
Its simplicity is its strength - the relative positions of the firm's entire
business portfolio can be displayed in a single diagram.
Limitations
 The growth-share matrix once was used widely, but has since faded from
popularity as more comprehensive models have been developed.
 Some of its weaknesses are: Market growth rate is only one factor in
industry attractiveness, and relative market share is only one factor in
competitive advantage. The growth-share matrix overlooks many other
factors in these two important determinants of profitability.
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 The framework assumes that each business unit is independent of the
others. In some cases, a business unit that is a "dog" may be helping other
business units gain a competitive advantage.
 The matrix depends heavily upon the breadth of the definition of the
market. A business unit may dominate its small niche, but have very low
market share in the overall industry. In such a case, the definition of the
market can make the difference between a dog and a cash cow.
 While its importance has diminished, the BCG matrix still can serve as a
simple tool for viewing a corporation's business portfolio at a glance, and
may serve as a starting point for discussing resource allocation among
strategic business units.

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 Southwest Airlines
Airline industry is very complex and very difficult to produce profits. In such a difficult
environment, it is remarkable that southwest airlines has consistently been profitable.
• In the last 20 years ending in 2009, southwest has generated consistent profits each year
ranging from a high of $ 645 million in 2000 to a low of $99 million in 2009.
• Southwest targeted passengers that valued low fares but wanted consistent service that was
friendly and punctual.
• To best deliver this value proposition, Southwest designed its processes to serve short
haul city pairs, provide single class air transportation using only one airplane type.
• Planes were turned around quickly at gates to achieve much higher flying times
per day-than the industry average.
• Despite rising wages of its employees, Southwest has succeeded in maintaining high
labor productivity, thus keeping its overall costs low.
• The alignment between its business processes and strategic position has allowed
Southwest to deliver consistently positive financial results.
Many other low-cost carriers have sprung up all over the world., though none has been
quite as successful as Southwest, One of the more successful low-cost carriers outside the
United States has been Ryanair.

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The success of Southwest contrasts with the efforts of traditional carriers such as Delta and
United.
• United entered bankruptcy between 2003 and 2006 in order to restructure and try to
return to profitability.
• Delta lost almost $9 million in 2008. Both carriers have also attempted to set up low-
cost subsidiaries with limited success.
• Delta set up Delta Express in 1996 to compete with low-cost carriers. It ceased
operations in 2003 after Delta established Song another low-cost subsidiary. In May
2006, Song ceased operating as an independent brand and was brought back into the
Delta network.
• In 2003, United setup its low-cost unit Ted. This effort was also short-lived with the
Ted brand and services discontinued at the end of 2008.

The success of Southwest Airlines and the contrasting difficulties of traditional carriers
raise a set of questions linking a firm's strategy to its business processes.
• How does a company's strategic positioning in the market affect its choice of
business processes?
• How can a company verify that its processes have the appropriate competencies to
support its competitive strategy?
• How can a company use the trade-offs inherent in process competencies to its
advantage when designing its business processes?
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 Operations Strategy
Strategies: The military used the word strategies to mean grand plans made in
light of what it was believed an adversary might or might not do. While the
term still usually has a competitive implication, manager increasingly use it to
reflect broad areas of an enterprise's operation.

Strategy is defined as the

 determination of the basic long-term objectives of an enterprise and
 adoptation of courses of action and
 allocation of resources necessary to achieve the goals.

Strategy should describe how firm intends to create and sustain value for its
current shareholders (giving due consideration to stake holders). In recent
times, the concept of sustainability also added to it.

Sustainability: The ability to meet current resource needs without

compromising the ability of future generations to meet their needs.

It is further expanded by the concept called triple bottom line, i.e., evaluating
the firm against social, economic and environmental criteria.
Operations Strategy and Competitiveness
• A company’s competitiveness refers to its relative position in
comparison to other firms in the local or global market place.

• Operations strategy is concerned with

 setting broad policies and plans for using the resources of the firm
 to best support the firm’s long-term competitive strategy

• Competitive strategy tries to

 understand the needs of the customer and
 identifies the needs of the customer that the organization is going to
satisfy

• An operations strategy involves decisions that relate to

 the design of a process and
 the infrastructure needed to support the process
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• Process design includes
 the selection of appropriate technology,
 sizing the process over time,
 the role of inventory in the process, and
 locating the process
• Infrastructure decisions involve
 the logic associated with planning and control systems,
 quality assurance and control approaches,
 work payment structures, and
 the organization of the operations function

• The operations priorities need to be competitive for the company to

be competitive.

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 Walmart
Walmart, the well-known retailer, is an example of consistency in strategic hierarchy. Walmart has
positioned itself as a low-cost retailer of medium-quality goods supplied with high accessibility and
availability in terms of both store locations and continuous product availability on store shelves.
• To support this business strategy, Walmart's operations strategy calls for an efficient distribution
process that features short response times and low inventory levels.
• To accomplish both of these seemingly contradictory objectives, Walmart's logistics process calls for
its own transportation fleet and information network, complete with satellite communications
systems to connect stores in well-chosen locations.
• To ensure close communication among retail outlets and suppliers-and thus quick replenishment of
depleted stocks---point-of-sales(POS) data are transmitted by a proprietary information system
called Retail Link.
• Low pipeline-inventory levels are achieved by a system called cross-docking: incoming trucks dock
opposite outgoing trucks so that goods can be transferred directly from incoming to outgoing
trucks without intermediate storage.
The overall result is impressive, even when compared with other industry leaders:
 a high inventory turnover rate (Walmart achieved 9.2 turns in 2009 compared to 6.1 for Target),
improved targeting of products to markets (resulting in fewer stockouts and markdowns),
significantly higher sales per square foot of store space (Walmart averaged sales of $425 per
square foot in 2009 compared to $273 for Target),
dominant market share, and growth (Walmart’s sales in 2009 were about $405 billion compared
to about $63 billion for Target).
Walmart is, therefore, an outstanding example of a strategically well-positioned firm that has carefully
orchestrated its operation strategy and ME3105-
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architecture to support its business strategy. 22
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 Operations Priorities (Competitive Dimensions)

• The major competitive dimensions that form the competitive position of a

firm are:
 Cost or Price,
 Quality,
 Delivery speed, Delivery reliability,
 Coping with changes in demand,
 Flexibility and new-product introduction speed, and
 Other product-specific criteria

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 Cost or Price: “Make the Product or Deliver the
Service Inexpensively”
• A segment of the market that buys solely on the basis of low cost.

• Product or services sold strictly on the basis of cost are typically

commodity-like. In other words, customers cannot distinguish the product
or service of the firm from that of another.

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 Quality: “Make a Great Product or Deliver a Great Service”

• There are two characteristics of a product or service that define quality: design quality and
process quality

• Design quality relates to the set of features the product or service contains

• The goal in establishing the proper level in design quality is to focus on the requirements of the
customer

• Overdesigned products and services with too many or inappropriate features will be viewed as
prohibitively expensive. In comparison, underdesigned products and services will lose
customers to products that cost a little more but are perceived by customers as offering greater
value.

• Process quality is critical because it relates directly to the reliability of the product or service.

• The goal of the process quality is to produce defect-free products and services.

• Adherence to specifications is critical to ensure the reliability of the product or service as

defined by its intended use.

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Delivery Speed: “Make the Product or Deliver the Service Quickly”
• Ability to deliver more quickly than its competitors

Delivery Reliability: “Deliver It When Promised”

• Firm’s ability to supply the product or service on or before a promised delivery date

Coping with Changes in Demand: “Change Its Volume”

• In many markets, a company’s ability to respond to increases and decreases in demand is
important to its ability compete.

• Ability to effectively deal with dynamic market demand over the long term is an
essential element of operation strategy

Flexibility and New-Product Introduction Speed: “Change It”

• Flexibility, from the strategic perspective, refers to the ability of a company to offer a
wide variety of products to its customers

• An important element of this ability to offer different products is the time required for a
company to develop a new product and to convert its processes to offer the new product

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Other Product-Specific Criteria: “Support It”

 Technical liaison and support: A supplier may be expected to provide

technical assistance for product development, particularly during the early
stages of design and manufacturing

 Meeting a launch date: Coordinating work between firms and working

simultaneously on a project will reduce the total time required to complete the
project

 Supplier after-sale support:

 Environmental impact: Dimensions related to criteria such as carbon dioxide

emission (measured in CO2), use of non-renewable resources, or other factors
that relate to sustainability.

 Other dimensions: Include colour available, size, weight, location of the

fabrication site, customization available, and product mix options.

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The Notion of Trade-Offs
• The central focus of operations strategy is the notion of operation focus
and trade-offs

• The underlying logic is that an operation cannot excel simultaneously on

all competitive dimensions

• Management has to decide which parameters of performance are

critical to the firm’s success and then concentrate the resources of the
firm on these particular characteristics

• Trade-offs occur when activities are incompatible so that more of one thing
necessitates less of another

• Straddling occurs when a company seeks to match the benefits of a

successful position while maintaining its existing position

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 Dealing with Trade-offs
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 Strategic Fit
• Once the firm's business strategy has defined its position in the
competitive space (as defined by price, time, variety, and quality),

• Business processes are then designed and managed to attain and

maintain that position.

• It distinguishes an effective business process of a firm with the

competitor.

• Strategic fit means consistency between the strategic position that a

firm seeks and the competencies of its process architecture and
managerial policies.

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 Dell
Dell is a perfect illustration of the need to constantly adapt both the strategic position and the
process architecture. Dell, founded in early 1984, was the worldwide leader in the computer
industry with a global market share nearing 18 percent in 2004.
• Dell's initial focus was to increase product variety and customization while keeping product cost
low and delivery-response time and quality acceptable.
• To best deliver that specific value proposition, Dell designed an operational process that involved
direct sales coupled with a lean and responsive assemble-to-order system.
• According to Carpenter (2003),
Michael Dell explains that "his key to success was putting the focus on the customer and
building a custom computer that was exactly what the user needed." The perfect fit between
intended strategic positioning and the process used to deliver the products yielded impressive
returns: "[Michael] Dell said his business grew by 80 percent for the first eight years, 60 percent
for the next six and about 20 percent each year since then.” After ten spectacular years, Dell hit
a rough patch between 2005 and 2010. Revenues increased marginally from $49 billion in 2004 to
$53 billion in 2009. Annual net income, however, declined from over $3 billion in 2004 to under
$1.5 billion in 2009.
In fact, Michael Dell returned to the company in 2007 to alter the two key process architecture
choices that had led to success earlier.
 He introduced selling computers through retail stores like Walmart(instead of only selling direct) and
outsourced some assembly to third parties who often built computers to stock rather than to order.
 The changes in process architecture were required because more of a commodity over time, and
customer priorities shifted from variety (customization) to low cost.
This required Dell to design new processes
ME3105-focused
Production on low cost rather than flexibility.
Management 32
 Market and Process driven strategies

Strategic fit may be achieved using either of two

approaches:
1. Market-driven strategy: A firm starts with key
competitive priorities and then develops processes to support
them.
2. Process-driven strategy: A firm starts with a given set
of process competencies and then identifies a market
position that is best supported by those processes.

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Operations Strategy Framework: From
Customer Needs to Order Fulfillment

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