Operations StrategyOperations Strategy

What is Operations Strategy ?What is Operations Strategy ?

Operations Strategy is concerned with setting broad policies and plans for using firm resources to best support long-term competitive strategy.

Operations strategy needs to support overall corporate strategy.

Competitive DimensionsCompetitive Dimensions

1. Cost

2. Quality (product & process)

3. Delivery Speed

4. Delivery Reliability

5. Demand Management

6. Variety

7. Innovation

Make it cheap

Make it good

Make it fast

Deliver as promised

Handle Changes in Demand

Make more than one type

First mover advantage

Competitive DimensionsCompetitive Dimensions

All of the competitive dimensions are important…

why not try to excel along every one?

Competitive Dimensions and Trade-offsCompetitive Dimensions and Trade-offs

Trade-offs

Trade-offs: Decisions that arise because of the inability of processes to excel simultaneously across all competitive dimensions.

Which Dimensions Should Be the Focus?Which Dimensions Should Be the Focus?

Order winners: Criterion that differentiates one firm from another.

Examples: Cost (Southwest Airlines), service quality (Ritz-Carlton Hotels), Flexibility (Dell)

Order qualifier: Criterion that permits the firm’s products to even be considered for purchase.

Example: basic quality necessary to be considered a good car (consumer reports).

ExampleExample

Southwest Airlines overall corporate strategy is to

“serve price- and convenience-sensitive customers.”

Corporate Strategy

Marketing Strategy

FinanceStrategy

Operations Strategy

Developing an Operations StrategyDeveloping an Operations Strategy

1. Segment the market according to the product group. Example: High-end vs. low-end consumers

2. Identify (a) product requirements, (b) demand patterns, (c) profit margins. Example: many components, seasonal, low demand, high profit margin.

3. Determine the order winners and order qualifiers. Example: delivery speed (winner), cost (qualifier)

4. Convert order winners into specific performance requirements. Example: Must sell at or below $600

Developing an Operations StrategyDeveloping an Operations Strategy

The next step is to analyze the process level…

1. Define the complexity and volume of your product/service.

2. Define whether you offer few specific products/services or highly customized products/services.

3. Determine product design, process design, supply chain design, supplier relations, capacity management plan & technology choice

ExamplesExamples

ExamplesExamples

• Southwest Operations – low cost

– Point-to-point between midsize cities & secondary airports in large cities

– 15-min gate turnaround

– No meals

– No assigned seats

– No interline baggage checking

– No premium classes of service

– Automated gate ticketing

– Standardized fleet of aircraft

Measuring whether the strategy is workingMeasuring whether the strategy is working

Productivity is a common measure for how well a company is utilizing its resources

Inputs

Outputs ty Productivi

• Productivity measurement shows how well the company performs for a given level of inputs.

• Partial measures may give more specific details about performance.

Material

Outputor

Captial

Outputor

Labor

Output

Productivity MeasurementProductivity Measurement

Example: Consider the following case. A bank has net output (income) of $500,000. The bank employs 40,000 people.

The partial labor productivity is 500,000 / 40,000 = 12.5

What does this tell you?

Productivity MeasurementProductivity Measurement

The productivity index is a relative measure. It has to be compared with something else:

1. Benchmarking.

2. Changes over time.

The important thing is to be consistent in measurement!

ExamplesExamples

ExamplesExamples

• Walmart – low cost

– High investment into IT to manage inventory, analyze point of sales data, track shipments, etc.

– Management by data

– Scale

– Negotiation power with suppliers

Summary and ConclusionsSummary and Conclusions

1. Firms must trade-off competitive dimensions when defining operations strategy.

2. This can be done by defining order winners and order qualifiers.

3. A Productivity Index can measure the relative performance between firms (or products, SBU’s, etc)