Chapter 2Chapter 2Operations Strategy and Operations Strategy and Performance ManagementPerformance Management

Strategy and Strategy and Strategic PlanningStrategic Planning

Corporate StrategyCorporate StrategyA set of objectives, plans, and policies for the

organization to successfully compete in its markets.

Long range (3 to 5 years) It specifies what organization’s competitive

advantage will be Focuses on few key areas

Corporate StrategyCorporate StrategyOutline of Corporate Strategy Specifies business(es) of the company (new

products/services) Identifies opportunities & threats of the

environment (environmental responses) Determines growth objectives (goals) Differentiates from others (core competencies) Global strategies (Strategic alliance, Locating

abroad)

A well formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents

•Organizational resources:

•assets

•capabilities•functional strengths

•technology

•product development

•process & market expertise

•Posture:

•competitive priorities

Considerations…

•Responding to flexibility

•competition, manpower, volume, technology, etc.

•Adjusting to business environment

•through environmental assessment

•Identifying Core Competencies

•unique resources and strengths

Strategy Formulation

Mission and Vision Statements

• Mission statements express organization’s purpose or reason for existence.

Includes: Products, technologies, market, customers, competencies

• Vision statements used to express organization’s values and aspirations - Solectron: “Be the best and continuously improve”.

Core Competencies

• Collective knowledge and skills an organization has that distinguish it from the competition.

• Typically center on an organization’s ability to integrate a variety of specific technologies and skills in the development of new products and services.

• Building blocks of core capabilities.

Core Competencies continued

• Are basis on which new outputs are developed.

• Better to think of organization in terms of its portfolio of core competencies than as a portfolio of products.

• Identifying and developing core competencies is one of top management’s most important roles.

Core Capabilities

• Organization practices and business processes

• Transferring out core processes could result in Hollowed Out and Creeping Breakeven Phenomenon effects

Core Competencies Used to Gain Access to Variety of

Markets• Cannon

– core competencies in optics, imaging, and electronic controls

– Products include copiers, laser printers, cameras, and image scanners.

• Boeing– integrating large scale systems– commercial jetliners, space stations,

missiles

Key Characteristics of Core Competencies/Capabilities

• Should be used to gain access to a variety of markets

• Should be strongly related to key benefits provides by products or services

• Should be difficult to imitate

Repercussions of Extensive Outsourcing Activities

• Hollowed Out Phenomenon

• Creeping Break-even Phenomenon

Hollowed Out

• The extent that most of a firm’s complex parts and production are outsourced

• Often when complex parts outsourced, engineering talent follows

• Supplier may become competitor

Creeping Breakeven Phenomenon

• Viscous cycle where products appear to become more expensive to produce in-house as others are outsourced.– Result from ways overhead is allocated

• Logical conclusion is organization ends up producing no outputs.

Market AnalysisMarket AnalysisCorporate strategy• goals• core competencies• environmental responses• new products/services• global strategies

Market analysis•segmentation

•needs assessment

Market AnalysisMarket Analysis

To understand what customers want and provide it better than the competitors do.

How?– Market segmentation– Needs assessment for each segment

Competitive PrioritiesCompetitive PrioritiesCorporate strategy• goals• core competencies• environmental responses• new products/services• global strategies

Market analysis• segmentation• needs assessment

Competitive prioritiesOperationsMarketing•cost•quality Finance•time•flexibility Others

Competitive PrioritiesCompetitive PrioritiesCorporate strategy• goals• core competencies• environmental responses• new products/services• global strategies

These priorities can be grouped into 4 categories:

Cost 1. Low-cost operationsQuality 2. High-performance

design3. Consistent quality

Time 4. Fast delivery5. On-time delivery6. Development speed

Flexibility 7. Customization8. Volume flexibility

Competitive PrioritiesCompetitive PrioritiesCorporate strategy• goals• core competencies• environmental responses• new products/services• global strategies

Market analysis• segmentation• needs assessment

Competitive prioritiesOperations

Marketing• cost• quality Finance• time• flexibility Others

Functional Area StrategiesFunctional Area StrategiesCorporate strategy• goals• core competencies• environmental responses• new products/services• global strategies

Market analysis• segmentation• needs assessment

Competitive priorities

OperationsMarketing

• cost• quality

Finance• time• flexibility Others

Functional area strategies•finance•marketing•operations•others

•The means to implement Corporate Strategy

•Links ST and LT Operations decisions

•Cross-functional coordination

CapabilitiesCapabilities

Capabilities• current• needed• plans

Corporate strategy• goals• core competencies• environmental responses• new products/services• global strategies

Market analysis• segmentation• needs assessment

Competitive priorities

OperationsMarketing

• cost• quality

Finance• time• flexibility OthersFunctional area

strategies• finance• marketing• operations• others

Strategy and DecisionsStrategy and Decisions

Operations strategy

Market analysis

Competitive priorities

Corporate strategy

Services Manufacturing• Standardized services• Assemble-to-order• Customized services

• Make-to-stock• Assemble-to-order• Make-to-order

Operations StrategyCompetitive priorities

Standardized ServiceConsistent quality

On time delivery

Low cost

Assemble-to-order Customization

Fast Delivery

Customized services High performance Design

Customization

Strategy and DecisionsStrategy and Decisions

Operations strategy

Market analysis

Competitive priorities

Corporate strategy

Services Manufacturing• Standardized services• Assemble-to-order• Customized services

• Make-to-stock• Assemble-to-order• Make-to-order

Operations StrategyCompetitive priorities

Make to Stock Standardized Product

Accurate Forecast

Consistent quality

On time delivery

Low cost

Assemble-to-order Customization

Fast Delivery

Make-to-Order High performance Design

Customization

Strategy and DecisionsStrategy and Decisions

Operations strategy

Market analysis

Competitive priorities

Corporate strategy

Services Manufacturing• Standardized services• Assemble-to-order• Customized services

• Make-to-stock• Assemble-to-order• Make-to-order

• Process decisions• Quality decisions• Capacity, location, and layout decisions• Operating decisions

Strategy and DecisionsStrategy and Decisions

Operations strategy

• Process decisions• Quality decisions• Capacity, location, and layout

decisions• Operating decisions

Market analysis

Competitive priorities

Corporate strategy

Services Manufacturing• Standardized services• Assemble-to-order• Customized services

• Make-to-stock• Assemble-to-order• Make-to-order

Capabilities

Three Perspectives on Three Perspectives on Operations StrategyOperations Strategy

Operations Strategy as:

•Rational•Product-Process Matrix

•Organizational•Strategy development & strategy deployment (“honshin kanri”)

•Political

Operations-Based Strategy

Strategy too often a high-level chess game Operations is foundation for strategy

– Attack larger, entrenched competitors– Buttress (support) existing competitive advantage– Inherently difficult to imitate

Examples– Australian Paper Manufacturers– Crown Equipment– Southwest Airlines, Wal-Mart– American Connector Company (counterattack)

Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Attacking through Operations

Appeal to different customer needs– Differentiate from current players

• Price, quality, flexibility, speed, innovation

– Build consistent operations infrastructure• Integrated values, skills, technologies, relationships, …• Difficult for competition to duplicate

Build experience and capabilities– Get down the learning curve– Means of building capabilities

• Process, systems, and/or organization-based

Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Defending through Operations

How to defend against ops-based attacks?

1. Exploit own internal strengthsReemphasize existing capabilities

2. Attack attacker’s ops-based weaknessesFocus on what attacker cannot do

3. Emulate attacker’s strategy, but fasterAcknowledge threat and respond rapidly

Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Ops Strategy Sustains Advantage

Operations-based strategies are robust Difficult to replicate, slow to diffuse

– Require substantial organizational change and realignment

– Impact management philosophy and corporate culture

Dynamic and unpredictable– Continuous improvement, ongoing invention– Learn and adapt quickly

Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Operations-Based Lessons Ops capabilities cannot be bought of shelf

– Ops capabilities take a long time to develop Develop rapid organizational learning

– Ops capabilities often recognized after the fact Quickly recognize latent threats

– Don’t ignore small or foreign competitors Don’t strive for “best practice,” search for

“new practice”– Push the envelope of the efficient frontier!

Focus! Do fewer things, but do them better…

Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Measuring Operations Measuring Operations PerformancePerformance

•Balanced Scorecard

•Cost and Productivity

•Quality

•Time

•Availability and Flexibility

Common Metrics