Lecture Note/Mebratu L.

11/07/22 1
 Chapter 2
OPERATIONS STRATEGY, COMPETITIVENESS & Productivity

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2.1. Introduction to operations strategy
Today’s successful operations managers need to have a global view of
operations strategy. Sellers and consumers, directly or indirectly, are all players
on the global economic stage. Technology, reliable shipping, and inexpensive
communication relax barriers of global transactions and promote competitions.
These advancements mean that, increasingly, firms find their customers and
suppliers are integrated globally. The result of such advancements is the growth
of world trade, global capital markets, the international movement of people, and
most importantly, competition. This means increasing economic integration and
interdependence of countries and firms—globalization. In response,
organizations are hastily expanding their distribution channels and supply
chains globally. The result is innovative strategies where firms compete not just
with their own expertise but with the talent in the global supply chain.

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 Business: Mission
Produce and deliver distinctive and quality goods and
services to meet customer expectations

Competitiveness
relates to the
Strategy
effectiveness
relates to the course of
of an organization in the
actions/means that
marketplace relative to
determine how an
other
organization pursues
organizations that offer
its goals
similar products or
services

Productivity relates to
the effective use of
resources, and
it has a direct impact on
competitiveness

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Let’s start with Competitiveness
 Companies must be competitive to sell their goods and services in the marketplace.

Competitiveness is how effectively an organization meets the wants and needs

of customers relative to others that offer similar goods or services
 Competitiveness impacts quality, variety, customization, convenience, timeliness, and cost. (Globalization)
strategies contribute efficiency, adding value to products and services, but they also complicate the
operations manager’s job.
 Competition is intensified, forcing companies to adjust for a shrinking world.
 To survive in a competitive market environment, companies must be competitive to sell their goods and
services in the marketplace.
 Competitiveness is an important factor in determining whether a company prospers, barely gets by, or fails.
 Business organizations compete through some combination of their marketing and operations functions.
 Marketing, for example, influences competitiveness in several ways, including identifying consumer wants
and needs, pricing, and advertising and promotion.

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 Operations has a major influence on competitiveness through interrelated factors that
include product and service design, cost, location, quality, response time, flexibility,
inventory and supply chain management, and service.
 Product and service design should reflect joint efforts of many areas of the firm to achieve a match
between financial resources, operations capabilities, supply chain capabilities, and consumer wants and
needs. Special characteristics or features of a product or service can be a key factor in consumer buying
decisions.
 Cost of an organization’s output is a key variable that affects pricing decisions and profits. Cost-
reduction efforts are generally ongoing in business organizations.
 Productivity is an important determinant of cost/efficiency
 Location can be important in terms of cost and convenience for customers. Location near inputs can
result in lower input costs. Location near markets can result in lower transportation costs and quicker
delivery times.
 Quality refers to materials, design, and service. Consumers judge quality in terms of how well they
think a product or service will satisfy its intended purpose. Customers are generally willing to pay more
for a product or service if they perceive the product or service has a higher quality than that of a
competitor.

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  Proactive (Quick) response can be a competitive advantage. One way is quickly bringing new or improved
products or services to the market. Another is being able to quickly deliver existing products and services to a
customer after they are ordered, and still another is quickly handling customer complaints.
 Flexibility is the ability to respond to changes. Changes might relate to alterations in design features of a
product or service, or to the volume demanded by customers, or the mix of products or services offered by an
organization. High flexibility can be a competitive advantage in a changeable environment.
 Inventory management can be a competitive advantage by effectively matching supplies of goods with
demand.
 Supply chain management involves coordinating internal and external operations (buyers and suppliers) to
achieve timely and cost-effective delivery of goods.
 Service might involve after-sale activities customers perceive as value-added, such as delivery, setup,
warranty work, and technical support. Service quality can be a key differentiator; and it is one that is often
sustainable.
 Managers and workers are the people at the heart and soul of an organization, and if they are competent and
motivated, they can provide a distinct competitive edge by their skills and the ideas they create.
 Understanding competitive issues can help managers develop successful strategies.

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 Why do some organizations succeed while others fail?
(let’s Discuss)

Developing Mission and strategies

Mission: Goals:
The reason for the existence Provide detail and scope of
of an organization. the mission.

Strategies:
Plans/course of actions for
achieving organizational goals.

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 An effective operations management effort must have a mission so it knows where it is going and a strategy so
it knows how to get there.
 The mission of a business entity, expressed in its mission statement, answers ‘what business it is in’.
 Economic success, indeed survival, is the result of identifying missions to satisfy a customer’s needs and
wants. The organization’s mission is defined as its purpose—what it will contribute to society.
 Mission statements provide boundaries and focus for organizations and the concept around which the firm can
rally. It also serves as the basis for organizational goals.
 The mission states the rationale for the organization’s existence.
 Once an organization’s mission has been decided; each functional area (marketing, finance/accounting, and
production/operations) within the firm determines its supporting mission to achieve the firm’s overall mission.
 If the mission statement is clearly and well defined, it becomes easy for an organization to develop its
strategy.

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 With the mission established, strategy and its implementation can begin. Strategy is
an organization’s action plan to achieve the mission.
 Organizational strategy is important to guide the organization by providing direction
for, and alignment of, the goals and strategies of the functional units. Strategies can be
the main reason for the success or failure of an organization.
 Each functional area has a strategy for achieving its mission and for helping the
organization reach the overall mission. The strategies exploit opportunities and
strengths, neutralize threats, and avoid weaknesses.
 Firms achieve missions in three conceptual strategies:
 Differentiation: relates to product or service features, quality, reputation, or customer
service. This means operations managers are required to deliver goods and services that
are better , or at least different from competitors.
 Cost leadership: to providing differentiated (unique) products at lower or affordable
price, internal efficiency (low cost production).
 Responsiveness: relates to the ability to proactively respond to changing demand from
customers.

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The combination of the above strategies and translating them into concrete tasks be
accomplished enables a business entity to achieve a competitive advantage.
Competitive advantage implies the creation of a system that has a unique advantage over
competitors. The idea is to create customer value in an efficient and sustainable way.
If objectives/goals are destinations, then strategies are the roadmaps for reaching the
destinations. Strategies provide focus for decision making. Generally, organizations have
overall strategies called strategic/organizational strategies, which relate to the entire
organization. They also have functional strategies, which relate to each of the functional
areas of the organization, which support the overall strategies of the organization.
To accomplish the functional strategies, organizations need to have
Tactics.
Tactics are the methods and actions used to accomplish strategies. They are more
specific than strategies, and they provide guidance and direction for carrying out actual
operations.

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Rahel is a master student at Admas. Her:
Mission: Live a better life
Goal: A good income earning job
Strategy: Attend a productive Master program
Tactic: Identify how to finance the Master program
Operation: Register, attend classes, study teaching materials, books
and support materials, do assignments and presentations, take exams.

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 Some examples of strategies an organization might choose from
Low cost: Outsource operations to third-party that have low labor costs.
Scale-based strategies: Use capital-intensive methods to achieve high output
volume and low unit costs.
Specialization: Focus on narrow product lines or limited service to achieve higher
quality.
Newness: Focus on innovation to create new products or services.
Flexible operations: Focus on quick response and/or customization.
High quality: Focus on achieving higher quality than competitors.
Service: Focus on various aspects of service (e.g., empathy, accessibility, reliable).
Sustainability: Focus on environmental-friendly and energy-efficient operations.
To do so, organizations need to possess core competencies (i.e., the special
attributes or abilities that give an organization a competitive edge).

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 Strategy Formulation/Development
A key element of both organization strategy and operations strategy is strategy
formulation.
Strategy formulation takes into account the way organizations compete and a
particular organization’s assessment of its environment (opportunities and
threats), and its own strengths and weaknesses - SWOT in order to take advantage
of its core competencies. 
Strategy formulation is critical because strategies provide direction for the
organization, so they can play a role in its success or failure.
To formulate an effective strategy, managers must take into account the core
competencies of an organization, and they must scan the environment. The
managers must determine what competitors are doing, or planning to do.
Environmental scanning: is the monitoring of events and trends that present
either threats or opportunities for the organization. Generally these include
competitors’ activities; changing consumer needs; legal, economic, political, and
environmental issues; the potential for new markets; and the like.
Another key factor to consider when developing strategies is technological
change, which can present real opportunities and threats to an organization.
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 Technological changes occur in products (high-definition TV, improved
computer chips); in services (faster order processing, faster delivery); and in
processes (computer-assisted processing, flexible manufacturing systems). The
obvious benefit is a competitive edge.
 The managers must critically examine factors, which referred to as the SWOT
approach (strengths, weaknesses, opportunities, and threats), that could have
either positive or negative effects.
 Strengths and weaknesses have an internal focus and are typically evaluated by
operations people. Threats and opportunities have an external focus and are
typically evaluated by marketing people. SWOT is often regarded as the link
between organizational strategy and operations strategy.

 The core operations strategies are Customer-driven intended to achieve

five performance objectives:
- Cost:
- Quality:
- Flexibility:
- Speed (timeliness):
- Dependability:
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 Organizational strategy Operational strategy Examples of companies or
service

Low price Low cost Airlines; furniture company

Responsiveness Short processing Photo service; Ethio-

time Telecom; ELPA
On time delivery 3F; post office

Differentiation: New features; recent TV and car factories;

-New technology service; higher Apple
-High quality performance; Google
-Service superior customer Banks (ATM)
-Variety service; volume; Transportation (Buses)
-Location flexibility; Airplanes
innovation;
convenience;
Key Success factors (KSFs) and Core Competencies
Because
 no firm does everything exceptionally well, a successful strategy requires determining the firm’s key success factors and core competencies


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 Key success factors (KSFs) are those activities that are necessary for a firm to achieve its goals.
 KSFs can be so significant that a firm must get them right to survive.
 On the other hand, core competencies are the set of unique skills, talents, and capabilities that
a firm does at a world-class standard; A core competency may be the ability to perform the
KSFs or a combination of KSFs.
 The idea is to build KSFs and core competencies that provide a competitive
advantage and support a successful strategy and mission. By identifying and
strengthening key success factors and core competencies can an organization
achieve sustainable competitive advantage.

10 strategic OM decisions that typically include the KSFs

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 Support a Core Competency and Implement Strategy by Identifying and
Executing the Key Success Factors in the Functional Areas

Marketing Operations Finance/Accounting

Service Leverage
Distribution Cost of capital
Promotion Working capital
Price Receivables
Channels of distribution Payables
Product positioning Financial control
(image, functions) Lines of credit

10 OM Decisions Sample options

Product - Customized or standardized; sustainability
Quality - Define customer quality expectations
Process - Facility design, automation, capacity
Location - Near supplier or near customer
Layout - Work cells, integrated departments/sections
Human resource - Specialized or general skill
Supply chain - Single or multiple suppliers
Inventory - When and how much to order; how much to keep
Schedule - Stable or fluctuated production rate
Maintenance - Preventive or repair when required. 19
 Integrate OM with other Activities
Whatever the KSFs and core competencies, they must be supported by the related activities.
One approach to identifying the activities is an activity map, which links competitive
advantage, KSFs, and supporting activities.
Imagine that the Ethiopian Airlines aims operations as its core competency for its
domestic flight services and aims to build a set of integrated activities to achieve a low cost
competitive advantage.
Courteous and No
limited meals/lower
Self-help Lean, passenger gate costs
passengers/ productive service
automated employees
check-in
Competitive po Poin
in t-
t r to
Higher advantage: Low cost ou -
tes
aircraft
utilization

Frequent and No idle

Standardized time/low
aircraft reliable
Only Boeing schedules administrati
737 in stock on cost
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Operations strategy
Operations strategy is the approach, consistent with the organization strategy,
that is used to guide the operations function.
Operations strategy relates to products, processes, methods, operating resources,
quality, costs, lead times, and scheduling.
Operational strategies are driven from organizational strategies.

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 The vision, mission and strategy of an organization can be transformed
into actions through the Balanced Scorecard (BSC).
 Using the BSC approach , managers develop objectives, metrics, and targets for
each objective and initiatives to achieve objectives, and they identify links
among the various (Customer, Financial, Internal business process, and Learning
and growth) perspectives.

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2.2. Operations strategy in Manufacturing
Manufacturing companies are characterized by:
- Producing physical (tangible) products (Goods) that customers can see and touch.
- Manufacturers produce goods for stock, with inventory levels aligned to forecasts of market demand.
- Manufacturers can produce goods without a customer order or forecast of customer demand.
- Manufacturers can automate many of their production processes to reduce their labour requirements,
although some manufacturing organizations are labour intensive.
- Manufacturers must have a physical location for their production and stock holding operations
The operational strategies of manufacturing companies thus need to based on an
integrated framework of:
 Facilities: Size, location, focus
 Capacity planning: Amount, timing, type
 Production technologies and processes: Equipment, automation, flexibility, scale, connectedness
 Human resource and management: Policies (wages/salary, security), skill
 Information communication: Use and level of investment; parity or differentiation
 Supply chain: Logistics, inventory policies, vendor relations, production planning
 Business process: Product generation, Order fulfilment, quality and flexibility, customer service and
support

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- Product strategy Competitive priority
- Pricing strategy -Cost
- Distribution strategy -Quality
- Communication/ -Innovativeness
promotion strategy -Flexibility
-Delivery performance

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2.3. Operations strategy in Services
 Service firms are characterized by:
 Delivery of services (consultancy, training, maintenance, medical treatment, etc.), which are intangible in nature.
 Do not hold inventory for further transformation from input to output.
 Service firms do not produce a service unless a customer requires it.
 A service firm recruits people with specific knowledge and skills in the service disciplines that it offers. Most service
delivery is labour intensive.
 Service firms do not, most of the time, require a physical production site. The people creating and delivering the service
can be located anywhere (E.g., a software developer can work from home).
 Competitive criteria: In service sector, competitive criteria entail the analysis of how well a service meets the needs
and wants of its intended customers in comparison with competing services.

Competitive criteria Example: in a hospital industry

Reliability Safety; confidentiality
Speed (timeliness) Service agility
Flexibility Flexible medication hours; customization
Attendance Easily accessible staff
Competence Capable and established doctors and nurses
Empathy Able to understand and feel starting from reception
Availability Equipment and state-of-the-arts technology
Price Reasonable; affordable
Location Strategic; convenient for customer; enough space for parking
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 Service operations strategy is typically described in terms of three types of deliberate
choices: structure (e.g. “bricks and mortar”), infrastructure (e.g. management systems
and policies), and integration-- that need to be made in designing the service system.
 These three broad decision areas are similar to those found in manufacturing strategy.

- Cost
- Design
- Delivery

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2.4. Productivity Measurement
Production vs Productivity
Production is the process of creating, growing, manufacturing, or improving goods and
services. It also refers to the quantity produced. In business and economics, productivity is
used to measure the efficiency or rate of production. It is the amount of output (e.g.
number of goods produced) per unit of input (e.g. labour, equipment, and capital).
Productivity:
Effectiveness of production and operation system may be viewed as the efficiency with
which inputs are converted into outputs.
The conversion efficiency can be gauged by ratio of the output to the inputs and is
commonly known as productivity of the system. Productivity is the ratio of input facilities
to the output of goods and services.
The more efficiently we make this change, the more productive we are and the more value
is added to the good or service provided. The operations manager’s job is to enhance
(improve) this ratio of outputs to inputs.
For an organization, improved productivity means improved efficiency.
This improvement can be achieved in two ways: reducing inputs while keeping output
constant or increasing output while keeping inputs constant. Both represent an improvement
in productivity. In an economic sense, inputs are labour, capital, land, and management,
which are integrated into a production system.
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Why productivity?
Productivity is important because:
It helps to cut down cost per unit and thereby improve the profits (profitability).
Gains from productivity can be transferred to the consumers in the form of lower
priced Products or better quality products (customer satisfaction).
Gains can also be shared with workers or employees by paying them at higher
rate (employee benefits and satisfaction).
Overall productivity reflects the efficiency of production system (resource
optimization).
More output is produced with same or less input.
An increase in productivity is always an opportunity for growth.
Reducing Waste And Environmental Impact
Increased productivity (more efficient) leads to increased competitiveness

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Productivity measurement
 Although productivity is important for all business organizations, it is
particularly important for organizations that use a strategy of low cost,
because the higher the productivity, the lower the cost of the output.
 A productivity ratio can be computed for a single operation, a department, an
organization, or an entire country. In business organizations, productivity ratios
are used for planning workforce requirements, scheduling equipment, financial
analysis, and other important tasks.
 Productivity may be measured either on aggregate basis or on individual basis,
which are called total and partial measure.
 Productivity has important implications for business organizations and for
entire nations.
 For nonprofit organizations, higher productivity means lower costs; for profit-
based organizations, productivity is an important factor in determining how
competitive a company is. For a nation, the rate of productivity growth is of
great importance.
 Productivity growth is the increase in productivity from one period to the next
relative to the productivity in the preceding period.

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Productivity in the Service Sector
Productivity measurement is particularly difficult in the service sector, where the
end product can be hard to define. The service sector provides a special challenge
to the accurate measurement of productivity and productivity improvement.
Productivity measurements require specific inputs and outputs. The traditional
analytical framework of economic theory is based primarily on goods-producing
activities.
Productivity of the service sector has proven difficult to improve because
service-sector work is:
 Typically labour intensive (e.g., counselling, teaching).
 Frequently focused on unique individual attributes or desires (e.g., investment
advice).
 Often an intellectual task performed by professionals (e.g., medical diagnosis).
 Often difficult to mechanize and automate (e.g., a haircut).
 Often difficult to evaluate for quality (e.g., performance of a law firm).

Reading assignment:
Factors that affect productivity

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Productivity improvement
A business organization or a department can take a number of key steps toward
improving productivity. These include:
1)Develop productivity measures for all operations. Measurement is the first step
in managing and controlling an operation.
2)Look at the system as a whole in deciding which operations are most critical. It
is overall productivity that is important.
3)Develop methods for achieving productivity improvements, such as soliciting
ideas from workers (teams of workers, engineers, and managers), studying how
other firms have increased productivity, and reexamining the way work is done.
4)Establishreasonable goals for improvement.
5)Make it clear that management supports and encourages productivity
improvement. Consider incentives to reward workers for contributions.
6)Measure improvements and publicize them.

Note that ‘Productivity is a measure of the use of resources’

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