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Copyright 2006 John Wiley & Sons, Inc. Beni Asllani Beni Asllani University of Tennessee at University of Tennessee at Chattanooga Chattanooga Operations Strategy Operations Strategy Operations Management - 5 th Edition Chapter 2 Chapter 2 Roberta Russell & Bernard W. Taylor, III

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Page 1: Strategy

Copyright 2006 John Wiley & Sons, Inc.Beni AsllaniBeni Asllani

University of Tennessee at ChattanoogaUniversity of Tennessee at Chattanooga

Operations StrategyOperations Strategy

Operations Management - 5th EditionOperations Management - 5th Edition

Chapter 2Chapter 2

Roberta Russell & Bernard W. Taylor, III

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Copyright 2006 John Wiley & Sons, Inc. 2-2

Lecture OutlineLecture Outline

Strategy FormulationStrategy Formulation Competitive PrioritiesCompetitive Priorities Operations’ Role in Corporate StrategyOperations’ Role in Corporate Strategy Strategy and the InternetStrategy and the Internet Strategic Decisions in OperationsStrategic Decisions in Operations Strategy DeploymentStrategy Deployment Issues and Trends in OperationsIssues and Trends in Operations

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Four Steps for Strategy Four Steps for Strategy FormulationFormulation

Defining a primary taskDefining a primary task What is the firm in the business of doing?What is the firm in the business of doing?

Assessing core competenciesAssessing core competencies What does the firm do better than anyone else?What does the firm do better than anyone else?

Determining order winners and order qualifiersDetermining order winners and order qualifiers What wins the order? What wins the order? What qualifies an item to be considered for purchase?What qualifies an item to be considered for purchase?

Positioning the firmPositioning the firm How will the firm compete?How will the firm compete?

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Competitive PrioritiesCompetitive Priorities

CostCost QualityQuality FlexibilityFlexibility SpeedSpeed

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Competitive Priorities: Competitive Priorities: CostCost

Lincoln ElectricLincoln Electric reduced costs by $10 million a year for 10 yearsreduced costs by $10 million a year for 10 years skilled machine operators save the company millions that skilled machine operators save the company millions that

would have been spent on automated equipmentwould have been spent on automated equipment

Southwest AirlinesSouthwest Airlines one type of airplane facilitates crew changes, record-one type of airplane facilitates crew changes, record-

keeping, maintenance, and inventory costskeeping, maintenance, and inventory costs direct flights mean no baggage transfersdirect flights mean no baggage transfers $30 million annual savings in travel agent commissions by $30 million annual savings in travel agent commissions by

requiring customers to contact the airline directlyrequiring customers to contact the airline directly

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Competitive Priorities: Competitive Priorities: QualityQuality

Ritz-Carlton - one customer at a timeRitz-Carlton - one customer at a time Every employee is empowered to satisfy a guest’s wish Every employee is empowered to satisfy a guest’s wish Teams at all levels set objectives and devise quality Teams at all levels set objectives and devise quality

action plansaction plans Each hotel has a quality leader Each hotel has a quality leader Quality reports tracksQuality reports tracks

guest room preventive maintenance cyclesguest room preventive maintenance cycles percentage of check-ins with no waitingpercentage of check-ins with no waiting time spent to achieve industry-best clean room time spent to achieve industry-best clean room

appearanceappearance Guest Preference Reports are recorded in a databaseGuest Preference Reports are recorded in a database

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Competitive Priorities: Competitive Priorities: FlexibilityFlexibility

Andersen WindowsAndersen Windows number of products offered grew from 28,000 to 86,000number of products offered grew from 28,000 to 86,000 number of errors are down to 1 per 200 truckloadsnumber of errors are down to 1 per 200 truckloads

Custom Foot Shoe Store:Custom Foot Shoe Store: customer’s feet are scanned electronically to capture customer’s feet are scanned electronically to capture

measurementsmeasurements custom shoes are mailed to the customer’s home in weekscustom shoes are mailed to the customer’s home in weeks prices are comparable to off-the-shelf shoesprices are comparable to off-the-shelf shoes

National Bicycle Industrial CompanyNational Bicycle Industrial Company offers 11,231,862 variationsoffers 11,231,862 variations delivers within two weeks at costs only 10% above standard delivers within two weeks at costs only 10% above standard

modelsmodels

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Competitive Priorities: Competitive Priorities: SpeedSpeed

Citicorp Citicorp advertises a 15-minute mortgage approvaladvertises a 15-minute mortgage approval

L.L. Bean L.L. Bean ships orders the day they are receivedships orders the day they are received

Wal-Mart Wal-Mart replenishes its stock twice a week replenishes its stock twice a week

Hewlett-Packard Hewlett-Packard produces electronic testing equipment in five daysproduces electronic testing equipment in five days

General Electric General Electric reduces time to manufacture circuit-breaker boxes into three days reduces time to manufacture circuit-breaker boxes into three days

and dishwashers into 18 hoursand dishwashers into 18 hours DellDell

ships custom-built computers in two daysships custom-built computers in two days Motorola Motorola

needs less than 30 minutes to build to order pagersneeds less than 30 minutes to build to order pagers

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Operations’ Role in Operations’ Role in Corporate StrategyCorporate Strategy

Operations provides support for a Operations provides support for a differentiated strategydifferentiated strategy

Operations serves as a firm’s Operations serves as a firm’s distinctive distinctive competence competence in executing similar strategies in executing similar strategies better than competitorsbetter than competitors

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Operations Strategy at Operations Strategy at Wal-MartWal-Mart

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Strategy and the InternetStrategy and the Internet

Internet can be used to create a Internet can be used to create a distinctive business strategydistinctive business strategy

eBayeBay unlimited capacity and a huge marketunlimited capacity and a huge market all work is done by buyers and sellers and all work is done by buyers and sellers and

there is no marginal costthere is no marginal costCiscoCisco

integrated value chain is its competitive integrated value chain is its competitive advantageadvantage

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Strategy and the Internet Strategy and the Internet (cont.)(cont.)

Internet can be used to strengthen existing competitive Internet can be used to strengthen existing competitive advantages by integrating new and traditional activitiesadvantages by integrating new and traditional activities GE’s Trading Process Network: an automated Web-based GE’s Trading Process Network: an automated Web-based

purchasing systempurchasing system cut average purchasing cost in halfcut average purchasing cost in half enabled a much larger group of suppliers to bid on jobsenabled a much larger group of suppliers to bid on jobs customers were able to track their orders through shop in real timecustomers were able to track their orders through shop in real time

Intel Intel sells $2 billion a month over the Internetsells $2 billion a month over the Internet purchases 80% of its direct materials onlinepurchases 80% of its direct materials online replaced 19,000 sales-order faxes received dailyreplaced 19,000 sales-order faxes received daily

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Strategy and the Internet Strategy and the Internet (cont.)(cont.)

Lessons from the dot com shakedownLessons from the dot com shakedown Internet is the great equalizerInternet is the great equalizer

allows innovations to be copied with little investmentallows innovations to be copied with little investment companies may reach larger marketcompanies may reach larger market customers have more information and can compare customers have more information and can compare

prices and features of their products.prices and features of their products. These benefits are temporary unless…These benefits are temporary unless…

Companies provide unique value to customerCompanies provide unique value to customer

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Strategic Decisions in Strategic Decisions in OperationsOperations

ProductsProducts

ServicesServices ProcessProcess

andand

TechnologyTechnology

CapacityCapacity

HumanHuman

ResourcesResources QualityQuality

FacilitiesFacilities SourcingSourcing OperatingOperating

SystemsSystems

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Operations Strategy: Operations Strategy: Products and ServicesProducts and Services

Make-to-OrderMake-to-Order products and services are made to customer products and services are made to customer

specifications after an order has been receivedspecifications after an order has been received

Make-to-StockMake-to-Stock products and services are made in anticipation of products and services are made in anticipation of

demanddemand

Assemble-to-OrderAssemble-to-Order products and services add options according to products and services add options according to

customer specificationscustomer specifications

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Production Strategy:Production Strategy:Processes and technologyProcesses and technology

ProjectProject one-at-a-time production of a product to customer orderone-at-a-time production of a product to customer order

Batch ProductionBatch Production systems process many different jobs at the same time systems process many different jobs at the same time

in groups (or batches)in groups (or batches) Mass ProductionMass Production

large volumes of a standard product for a mass marketlarge volumes of a standard product for a mass market Continuous ProductionContinuous Production

used for very high volume commodity productsused for very high volume commodity products

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Product-Process MatrixProduct-Process Matrix

Source: Source: Adapted from Robert Adapted from Robert Hayes and Steven Wheelwright, Hayes and Steven Wheelwright, Restoring the Competitive Restoring the Competitive Edge: Competing Through Edge: Competing Through Manufacturing Manufacturing (New York: John (New York: John Wiley & Sons, 1984), p. 209Wiley & Sons, 1984), p. 209

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Mor

e Sta

ndar

dize

d –

Hig

her V

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Mor

e Sta

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d –

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ProjectConstruction of the aircraft carrier USS Nimitz was a huge project that took almost 10 years to complete.

Batch ProductionAt Martin Guitars bindings on the guitar frame are installed by hand and are wrapped with a cloth webbing until glue is dried.

Mass Production Here in a clean room a worker performs quality checks on a computer assembly line.

Continuous ProductionA paper manufacturer produces a continuous sheet paper from wood pulp slurry, which is mixed, pressed, dried, and wound onto reels.

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Service Strategy:Service Strategy:Processes and TechnologyProcesses and Technology

Professional ServiceProfessional Service highly customized and very labor intensivehighly customized and very labor intensive

Service ShopService Shop customized and labor intensivecustomized and labor intensive

Mass ServiceMass Service less customized and less labor intensiveless customized and less labor intensive

Service FactoryService Factory least customized and least labor intensiveleast customized and least labor intensive

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Service-Process MatrixService-Process Matrix

Source: Source: Adapted from Roger Adapted from Roger Schmenner, “How Can Service Schmenner, “How Can Service Businesses Survive and Businesses Survive and Prosper?” Prosper?” Sloan Management Sloan Management Review Review 27(3):2927(3):29

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Professional ServiceA doctor provides personal service to each patient based on extensive training in medicine.

Service ShopAlthough a lecture may be prepared in advance, its delivery is affected by students in each class.

Mass ServiceA retail store provides a standard array of products from which customers may choose.

Service FactoryElectricity is a commodity available continuously to customers.

Less

Cus

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-Les

s La

bor I

nten

sive

Less

Cus

tom

ized

-Les

s La

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nten

sive

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Operations Strategy:Operations Strategy:Capacity and FacilityCapacity and Facility

Capacity strategic decisions includeCapacity strategic decisions include: : WhenWhen, , how muchhow much, and in , and in what what form to alter form to alter

capacitycapacity Facility strategic decisions include: Facility strategic decisions include:

Whether demand should be met with a few large Whether demand should be met with a few large facilities or with several smaller onesfacilities or with several smaller ones

Whether facilities should focus on serving certain Whether facilities should focus on serving certain geographic regions, product lines, or customersgeographic regions, product lines, or customers

Facility location can also be a strategic decisionFacility location can also be a strategic decision

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Operations Strategy: Operations Strategy: Human ResourcesHuman Resources

What are the skill levels and degree of autonomy What are the skill levels and degree of autonomy required to operate production system?required to operate production system?

What are the training requirements and selection What are the training requirements and selection criteria?criteria?

What are the policies on performance What are the policies on performance evaluations, compensation, and incentives?evaluations, compensation, and incentives?

Will workers be salaried, paid an hourly rate, or Will workers be salaried, paid an hourly rate, or paid a piece rate?paid a piece rate?

Will profit sharing be allowed, and if so, on what Will profit sharing be allowed, and if so, on what criteria?criteria?

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Operations Strategy: Operations Strategy: Human Resources (cont.)Human Resources (cont.)

Will workers perform individual tasks or work Will workers perform individual tasks or work in teams?in teams?

Will they have supervisors or work in self-Will they have supervisors or work in self-managed work groups?managed work groups?

How many levels of management will be How many levels of management will be required?required?

Will extensive worker training be necessary?Will extensive worker training be necessary? Should workforce be cross-trained?Should workforce be cross-trained? What efforts will be made in terms of What efforts will be made in terms of

retention?retention?

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Operations Strategy: Operations Strategy: QualityQuality

What is the target level of quality for our What is the target level of quality for our products and services?products and services?

How will it be measured? How will it be measured? How will employees be involved with How will employees be involved with

quality?quality? What will the responsibilities of the What will the responsibilities of the

quality department be? quality department be?

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Operations Strategy: Operations Strategy: Quality (cont.)Quality (cont.)

What types of systems will be set up to What types of systems will be set up to ensure quality? ensure quality?

How will quality awareness be maintained?How will quality awareness be maintained? How will quality efforts be evaluated?How will quality efforts be evaluated? How will customer perceptions of quality be How will customer perceptions of quality be

determined? determined? How will decisions in other functional areas How will decisions in other functional areas

affect quality?affect quality?

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Operations Strategy: Operations Strategy: SourcingSourcing

Vertical IntegrationVertical Integration degree to which a firm produces parts that go degree to which a firm produces parts that go

into its productsinto its products Strategic DecisionsStrategic Decisions

How much work should be done outside the How much work should be done outside the firm? firm?

On what basis should particular items be On what basis should particular items be made in-house?made in-house?

When should items be outsourced?When should items be outsourced? How should suppliers be selected?How should suppliers be selected?

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Operations Strategy: Operations Strategy: Sourcing (cont.)Sourcing (cont.)

What type of relationship should be What type of relationship should be maintained with suppliers?maintained with suppliers?

What is expected from suppliers?What is expected from suppliers? How many suppliers should be used?How many suppliers should be used? How can quality and dependability of How can quality and dependability of

suppliers be ensured?suppliers be ensured? How can suppliers be encouraged to How can suppliers be encouraged to

collaborate?collaborate?

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Operations Strategy: Operations Strategy: Operating SystemsOperating Systems

How will operating systems execute strategic How will operating systems execute strategic decisions?decisions?

How does one align information technology and How does one align information technology and operations strategic goals?operations strategic goals?

How does information technology support both How does information technology support both customer and worker demands for rapid access, customer and worker demands for rapid access, storage, and retrieval of information?storage, and retrieval of information?

How does information technology support How does information technology support decisions making process related to inventory decisions making process related to inventory levels, scheduling priorities, and reward levels, scheduling priorities, and reward systems?systems?

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Strategic PlanningStrategic Planning

Missionand VisionMission

and Vision

CorporateStrategy

CorporateStrategy

OperationsStrategy

OperationsStrategy

MarketingStrategy

MarketingStrategy

FinancialStrategyFinancialStrategy

Voice of theBusiness

Voice of theBusinessVoice of the

CustomerVoice of the

Customer

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Policy DeploymentPolicy Deployment

Translating corporate strategy into measurable

objectives

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Key Key Performance Performance IndicatorsIndicators

Source: Source: Robert Kaplan and DavidRobert Kaplan and DavidNorton, Norton, Strategy Maps:Strategy Maps:Converting IntangibleConverting IntangibleAssets into TangibleAssets into TangibleOutcomes Outcomes (Boston:(Boston:Harvard Business SchoolHarvard Business SchoolPress, 2004), Figure 3-2,Press, 2004), Figure 3-2,p. 67p. 67

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Balanced ScorecardBalanced Scorecard

Radar ChartRadar ChartDashboardDashboard

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Issues and Trends in Issues and Trends in OperationsOperations

Global Markets, Global Sourcing, and Global Markets, Global Sourcing, and Global OperationsGlobal Operations

Virtual CompaniesVirtual Companies Greater Choice, More IndividualismGreater Choice, More Individualism Emphasis on ServiceEmphasis on Service Speed and FlexibilitySpeed and Flexibility

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Issues and Trends in Issues and Trends in Operations (cont.)Operations (cont.)

Supply ChainsSupply Chains Collaborative CommerceCollaborative Commerce Technological AdvancesTechnological Advances Knowledge and Ability to LearnKnowledge and Ability to Learn Environmental and Social Environmental and Social

ResponsibilitiesResponsibilities

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Characteristic20th-CenturyCorporation

21st-CenturyCorporation

Changing CorporationChanging Corporation

OrganizationOrganization

FocusFocus

StyleStyle

Source of strengthSource of strength

StructureStructure

ResourcesResources

PyramidPyramid InternalInternal StructuresStructures StabilityStability Self-sufficiencySelf-sufficiency Physical assetsPhysical assets

WebWeb ExternalExternal FlexibleFlexible ChangeChange InterdependenciesInterdependencies InformationInformation

Source: Source: Reprinted from John Byrne, “Management by Web,” Reprinted from John Byrne, “Management by Web,” Business Week Business Week (August 28, 2000), p. 87 (August 28, 2000), p. 87 by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.

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Characteristic20th-CenturyCorporation

21st-CenturyCorporation

Changing Corporation Changing Corporation (cont.)(cont.)

OperationsOperations

ProductsProducts

ReachReach

FinancialsFinancials

InventoriesInventories

StrategyStrategy

Vertical integrationVertical integration Mass productionMass production DomesticDomestic QuarterlyQuarterly MonthsMonths Top-downTop-down

Virtual integrationVirtual integration Mass customizationMass customization GlobalGlobal Real-timeReal-time HoursHours Bottom-upBottom-up

Source: Source: Reprinted from John Byrne, “Management by Web,” Reprinted from John Byrne, “Management by Web,” Business Week Business Week (August 28, 2000), p. 87 (August 28, 2000), p. 87 by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.

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Characteristic20th-CenturyCorporation

21st-CenturyCorporation

Changing Corporation Changing Corporation (cont.)(cont.)

LeadershipLeadership

WorkersWorkers

Job expectationsJob expectations

MotivationMotivation

ImprovementsImprovements

QualityQuality

InspirationalInspirational Employees, free agentsEmployees, free agents Personal growthPersonal growth To buildTo build RevolutionaryRevolutionary No compromiseNo compromise

Source: Source: Reprinted from John Byrne, “Management by Web,” Reprinted from John Byrne, “Management by Web,” Business Week Business Week (August 28, 2000), p. 87 (August 28, 2000), p. 87 by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.

DogmaticDogmatic EmployeesEmployees SecuritySecurity To competeTo compete IncrementalIncremental Affordable bestAffordable best

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