Operations Management Operations Strategy for Competitive Advantage

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Iona College Iona College

Operations Management Operations Management

MBA-540 MBA-540

Jerry Fjermestad

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Operations Operations Management Management

Operations Strategy for Competitive Operations Strategy for Competitive

Advantage Advantage

Chapter 2 Chapter 2

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Outline Outline

Global Company Profile: Komatsu

Identifying Missions and Strategies

 Mission

 Strategy

Achieving Competitive Advantage Through Operations

 Competing on Differentiation

 Competing on Cost

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Outline - continued Outline - continued

Ten Strategic OM decisions

Issues in Operations Strategy

 Research

 Preconditions

 Dynamics

Strategy Development and Implementation

 Identify Critical Success Factors

 Build and Staff the Organization

 Integrate OM with Other Activities

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Learning Objectives Learning Objectives

When you complete this chapter, you should be able to :

Identify or Define:

 Mission

 Strategy

 Ten Decisions of OM

Describe or Explain:

 Specific approaches used by OM to achieve strategic concepts

 Differentiation

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Komatsu Strategies Komatsu Strategies

1960s - licensed design and technology from others;

improved quality

1970s - became global enterprise and built export markets aided by increasing value of yen

1980s - joint ventures with Dresser, and manufacturing outside Japan

1990s - used the latest technology to improve quality and drive down costs; focused on electronic engine controls

2000s - increased European presence through ownership and joint ventures

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Komatsu Strategies Komatsu Strategies

Each strategy established in light of:

threats and opportunities in the environment

strengths and weaknesses of the organization (related to environment)

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Mission Mission

 Mission - where are you going?

 Organization’s purpose for being

 Provides boundaries & focus

 Answers ‘How can we satisfy people’s needs?’

 Expressed in published statement

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Sample Mission - Circle K Sample Mission - Circle K

As a service company, our mission is to:

Satisfy our customers’ immediate needs and wants by providing them with a wide variety

of goods and services at multiple locations.

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Sample Mission - Merck Sample Mission - Merck

The mission of Merck is to provide society with superior products and services -

innovations and solutions that improve the quality of life and satisfy customer needs - to provide employees with meaningful work and advancement opportunities and

investors with a superior rate of return

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Factors Affecting Mission Factors Affecting Mission

Mission Philosophy &

Values

Profitability

& Growth Environment

Customers Public Image

Benefit to

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Mission/Strategy Mission/Strategy

Mission - where you are going

Strategy - how you are going to get there

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Strategy Strategy

 Action plan to achieve mission

 Shows how mission will be achieved

 Company has a business strategy

 Functional areas have

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Strategy Process Strategy Process

Marketing Decisions

Operations Decisions

Fin./Acct.

Decisions Company

Mission Business Strategy

Functional AreaFunctional Area Strategies

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Competitive Advantage Through:

Differentiation

Cost leadership

Quick response

better, cheaper, more responsive

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Competing on Differentiation Competing on Differentiation

Uniqueness - can go beyond both the physical characteristics and service attributes to

encompass everything that impacts customer’s perception of value

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Competing on Cost Competing on Cost

Maximum value as perceived by customer

Does not imply low value or low quality

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Competing on Response Competing on Response

Flexible

Reliable

Rapid

Requires institutionalization within the firm of the ability to respond

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Competing On Any Basis Competing On Any Basis

Probably requires the institutionalization within the firm of the ability to change, to adapt

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OM’s Contribution to Strategy OM’s Contribution to Strategy

Quality Product Process Location Layout

Human Resource Supply Chain Inventory Scheduling

Compaq Computer’s ability to follow the PC market

Differentiation (Better)

Response (Faster) Cost leadership

(Cheaper) Southwest Airlines No-frills service

Sony’s constant innovation of new products

Pizza Hut’s five-minute guarantee at lunchtime Federal Express’s “absolutely, positively on time”

Motorola’s automotive products ignition systems Motorola’s pagers

IBM’s after-sale service on mainframe computers

FLEXIBILITY

Design Volume

LOW COST

DELIVERY

Speed

Dependability

QUALITY

Conformance Performance

AFTER-SALE SERVICE

Operations

Decisions Examples Specific Strategy

Used Competitive

Advantage

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10 Decision Areas of OM 10 Decision Areas of OM

 Goods & service design

 Quality

 Process & capacity design

 Location selection

 Layout design

 Human resource and job design

 Supply-chain management

 Inventory

 Scheduling

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Operations Decisions

Goods Services

Goods &

services decisions

Product is usually

tangible Product is usually

intangible

Quality Objective quality

standards Subjective quality standards

Process and

Customer not involved

in most of process Customer may be directly involved in process.

Goods & Services and the 10 Operations Goods & Services and the 10 Operations

Management Decisions Management Decisions

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Goods Services

Location Selection

May need to be near raw

materials or labor force Product is usually intangible

Layout Design

Layout can enhance

production efficiency Subjective quality standards

Human Resources and Job

Workforce focused on technical skills.

Labor standards consistent.

Customer may be directly involved in process.

Capacity matches

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Goods Services

Supply chain management

Supply-chain

relationships critical to final product

Supply-chain relationships important, not necessarily critical

Inventory Raw materials, work- in-process, and

finished goods

Most services cannot be stored

Scheduling Ability to convert

inventory may allow Primarily concerned with meeting the customer's

Goods & Services and the 10 Goods & Services and the 10

Operations Management Decisions Operations Management Decisions

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Goods Services

Maintenance Maintenance is often preventive and takes place at the production site

Maintenance is often

"repair" and takes place at the customer's site

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Process Design Process Design

Process-focused

Job Shops

(Print shop, emergency room , machine shop,

fine dining Repetitive (modular) focus

Assembly line

(Cars, appliances, TVs, fast-food restaurants)

Product-focused

Continuous

(steel, beer, paper, bread)

High

Moderate

Variety of Products

Mass Customization

Customization at high Volume

(Dell Computer’s PC)

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Operations Strategies for Two Drug Operations Strategies for Two Drug

Companies Companies

Brand Name Drugs,

Inc. Generic Drug Corp.

Competitive Advantage

Product Differentiation Low Cost

Product Selection and Design

Heavy R&D;

Extensive Labs

Little R&D

Quality Quality is a major

priority; Meets regulatory requirements on a country-by-country basis as

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Companies - continued Companies - continued

Brand Name Drugs,

Processes Product & modular production processes Long product runs in specialized facilities Build capacity ahead of demand

Process focuses

General production processes;

Job Shop approach, short run;

Focus on high utilization

Location Still located in city in

which it was founded Recently moved to low tax, low labor cost environment

Scheduling Central production

planning Many short run products complicate scheduling

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Brand Name Drugs, Inc.

Generic Drug Corp.

Human Resources

Hires the best; nation-

wide searches Very experienced top executives provide direction; other

personnel paid below average

Supply Chain

Long term supplier

relationship Tends to purchase competitively to find bargains

Inventory Maintains high finished goods inventory,

primarily to ensure all

Process focus drives up WIP inventory.

Finished goods inventory tends

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Brand Name Drugs,

Maintenance Highly trained staff;

Extensive parts inventory

Highly trained staff to meet challenging demands

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Characteristics of High ROI Firms Characteristics of High ROI Firms

High quality product

High capacity utilization

High operating effectiveness

Low investment intensity

Low direct cost per unit

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Strategic Options Managers Use to Strategic Options Managers Use to

Gain Competitive Advantage Gain Competitive Advantage

28% - Operations Management

18% - Marketing/distribution

17% - Momentum/name recognition

16% - Quality/service

14% - Good management

 4% - Financial resources

 3% - Other

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Gain Competitive Advantage Gain Competitive Advantage

28% Operations Management

 Low- cost product

 Product-line breadth

 Technical superiority

 Product characteristics/differentiation

 Continuing product innovation

 Low-price/high-value offerings

 Efficient, flexible operations adaptable to consumers

 Engineering research development

 Location

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Gain Competitive Advantage - Gain Competitive Advantage -

continued continued

18% Marketing/Distribution

17% Momentum/name recognition

16% Quality/service

14% Good management

 4% Financial resources

 3% Other

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Preconditions - Preconditions -

To Implement a Strategy To Implement a Strategy

One must understand:

 Strengths & weaknesses of competitors and new entrants into the market

 Current and prospective environmental, legal, and economic issues

 The notion of product life cycle

 Resources available with the firm and within the OM function

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Impetus for Strategy Change Impetus for Strategy Change

Changes in the organization

Stages in the product life cycle

Changes in the environment

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Stages in the Product Life Cycle Stages in the Product Life Cycle

Introduction

Growth

Maturity

Decline

Growth rate

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Strategy and Issues During a Strategy and Issues During a

Product’s Life Product’s Life

Introduction Growth Maturity Decline

Standardization

Less rapid product changes - more minor changes Optimum capacity Increasing stability of process

Little product differentiation Cost minimization Overcapacity in the industry

Prune line to eliminate items not returning good Forecasting critical

Product and process reliability Competitive product

improvements and options Increase capacity

Shift toward product focused Product design and

development critical

Frequent product and process design changes

Short production runs High production costs Best period to increase market share R&D product engineering critical

Practical to change price or quality image

Strengthen niche

Cost control critical Poor time to change image,

price, or quality

Competitive costs become critical

Defend market position

trategy/IssuesCompany Strategy/Issues

HDTV

CD-ROM Color copiers

Drive-thru restaurants Fax machines

Station wagons

Sales

3 1/2”

Floppy disks Internet

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Best period to increase market share R&D engineering are critical

Product design and development are critical Frequent product and process design changes Over-capacity

Short production runs High skilled-labor content High production costs Limited number of models

Introduction

Strategy & Issues During Product Life Strategy & Issues During Product Life

 Company Strategy &

Issues

 OM Strategy

& Issues

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Practical to change prices or quality image Marketing is critical

Strengthen niche Forecasting is critical

Product and process reliability

Competitive product improvements and options Shift toward product oriented

Enhance distribution

Company Strategy & Issues

OM Strategy & Issues

Growth

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Poor time to increase market share Competitive costs become critical

Poor time to change price, image, or quality

Defend position via fresh promotional and distribution approaches

Standardization

Less rapid product changes and more minor annual model changes

Optimum capacity

Increasing stability of manufacturing process

Maturity

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Cost control critical to market share

Little product differentiation Cost minimization

Overcapacity in the industry

Prune line to eliminate items not returning Good margin

Reduce capacity

Decline

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Strategy Development and Strategy Development and

Implementation Implementation

Identify critical success factors

Build and staff the organization

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SWOT Analysis Process SWOT Analysis Process

 Environmental Analysis

 Determine Corporate Mission

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SWOT Analysis to Strategy SWOT Analysis to Strategy

Formulation Formulation

Strategy Mission

External Opportunities Internal

Strengths

Internal External

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Identifying Identifying

Critical Success Factors Critical Success Factors

Decisions Sample Options

Product Customized, or standardized

Quality Define customer expectations and how to achieve them

Process Facility size, technology

Location Near supplier or customer

Layout Work cells or assembly line

Human resource Specialized or enriched jobs Supply chain Single or multiple source suppliers

Marketing

Service Distribution Promotion

Channels of distribution Product positioning (image, functions)

Finance/Accounting

Leverage Cost of capital Working capital Receivables Payables

Financial control Lines of credit

Production/Operations

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Critical Success Factors Critical Success Factors

Microsoft & Compaq Microsoft & Compaq

 They focus on one business

 They are global

 Their senior management is actively involved in defining and improving the product development process

 They recruit and retain the top people in their fields.

 They understand that speed to market reinforces product quality

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Activity Mapping: Southwest Airline’s Low Activity Mapping: Southwest Airline’s Low

Cost Competitive Advantage Cost Competitive Advantage

Courteous, but limited passenger service

Lean, productive

employees Short haul, point-to-point

routes, often to secondary airports

High aircraft utilization

Standardized fleet of

Frequent, reliable schedules

Competitive Advantage:

Low Cost

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No seat assignments No baggage transfers

Automated ticketing machines No meals

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Short haul, point-to-point routes, often to secondary

airports

Lower gate costs at secondary airports

High number of flights, reduces employee idle time between flights

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Frequent, reliable

High number of flights reduces employee idle time between flights

Saturate a city with flights

flowering administrative costs per passenger for that city

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Pilot training on only one type of aircraft

Reduced maintenance inventory required because of only one type of aircraft

Excellent supplier relations with Boeing has aided financing

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High aircraft utilization

Flexible employees and

standard planes aids scheduling Flexible union contracts

Maintenance personnel trained on only one type of aircraft

15 minute gate turnarounds

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Lean, productive employees

High level of stock ownership Hire for attitude, then train High employee compensation Empowered employees

Automated ticket machines

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Lean, productive

employees Short haul, point-to-point

routes, often to secondary airports

High aircraft

utilization Frequent, reliable

schedules

Competitive Advantage:

Low Cost

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Vanguard’s Activity System Vanguard’s Activity System

A broad array of mutual funds excluding some fund