Operations Strategy Leeds School of Business

Operations StrategyOperations Strategy

Leeds School of BusinessLeeds School of BusinessUniversity of ColoradoUniversity of ColoradoBoulder, COBoulder, CO

Professor Stephen Lawrence

Factories at Asnieres Seen from the Quai de Clichy – Van Gogh

Summary ofSummary ofOPERATIONS OPERATIONS

MANAGEMENTMANAGEMENT

Operations – 80-90% Hidden

TransformationProcesses

TransformationProcesses

GoodsGoods

ServicesServices

LaborLabor

KnowledgeKnowledge

CapitalCapital

MaterialsMaterials

Transformation Definition

INPUTS OUTPUTS

Added Value Model

adapted from Porter, Competitive Advantage, Free Press, 1985

Information SystemsInformation Systems

People and OrganizationPeople and Organization

FinanceFinance

AccountingAccounting

MarketingMarketing OperationsOperations

Profit!Profit!

CostCost

Added Value for CustomerAdded Value for Customer

The Value Equation

price

ePerformancValue

price

InnovationyFlexibilitTimelinessQualityValue

P

IFTQValue

Evolution ofEvolution ofOperations StrategyOperations Strategy

Operations in the 50’s & 60’s

Germany, Japan, Europe, and Asia – Industrial infrastructure destroyed in WWII

U.S. without significant international competition– 1945 to 1970

“The problem of production has been solved.”– John Kenneth Gailbraith– noted economist, 1950’s

Operations largely ignored, not “strategic”

“Manufacturing: Missing Link in Corporate Strategy”Wickham Skinner, Harvard Business Review, May-June 1969

Corporate management abdicates manufacturing strategy to low levels– Viewed as requiring technical skills– Morass of petty details

Companies become saddled with noncompetitive production systems

Strategic manufacturing issues involve– Plant and equipment– Production Planning and control– Labor and staffing– Product design and engineering– Organization and management

“Manufacturing: Missing Link in Corporate Strategy,”Wickham Skinner, Harvard Business Review, May-June 1969

“The Focused Factory”Wickham Skinner, Harvard Business Review, May-June 1974

Observations of 50+ factories– There are many ways to compete besides low cost– A factory cannot perform well on every yardstick– Factories were provided with inconsistent objectives– Focus on cost and efficiency rather than other measures

Problem: Too many factories try to do too much Solution: The focused factory

– Simplicity and repetition breed competence– Focus on relative competitive ability– Limit scope of factory’s responsibilities– Limit overhead, focus on production

“The Focused Factory,”Wickham Skinner, Harvard Business Review, May-June 1974

“Why Japanese Factories Work”Robert Hayes, Harvard Business Review, Jul-Aug 1981

Toured eight plants at six Japanese companies What I did not see

– Few modern structures, robots, quality circles– Aside: Toyota, GM, and NUMMI (1984)

What I did see– Clean orderly workplaces– Almost total absence of inventory – “root of all evil”– Stability and continuity in manufacturing processes

• Bottlenecks eliminated, machines & people not overloaded• Continuous equipment monitoring, preventative maintenance• No-crisis atmosphere

– “Pursuing the last grain of rice” approach to quality– Long term commitment to employer, employees, customers

“Why Japanese Factories Work,”Robert Hayes, Harvard Business Review, Jul-Aug 1981

“Competing Through Manufacturing”Wheelwright and Hayes, Harvard Business Review, Jan-Feb 1985

How effectively do companies use operations? Continuum of four stages

– Stage 1: Internally Neutral• Minimize negative impact of operations

– Stage 2: Externally Neutral • On par with competitors

– Stage 3: Internally Supportive• Provide credible support to business strategy

– Stage 4: Externally Supportive• Ops used to create competitive advantage

“Competing Through Manufacturing,”Wheelwright & Hayes, Harvard Business Review, Jul-Aug 1985

“Frugal Manufacturing”Schonberger, Harvard Business Review, Sep-Oct 1987

U.S. manufacturing an “extravagance of scale”– Too many U.S. plants are too large, too complex

Achieve a frugal focus– Improve/adapt conventional machines before automation– Don’t abrogate manufacturing strategy to lower levels, vendors– Improve capability to modify, customize, & simplify– Consider bigger and faster equipment with caution– Automate only when benefits are clear– Factories within factories– Split plants when they become too large

These ideas came to be know as “lean” manufacturing

“Frugal Manufacturing,”Schonberger, Harvard Business Review, Jul-Aug 1985

Manufacturing Operations Strategy

Emerging consideration of other means of competition– Garvin, “Competing on the Eight Dimensions of Quality,” HBR 1988– Stalk, “Time – The Next Source of Competitive Advantage,” HBR 1988– Stalk, Evans, and Schulman, “Competing on Capabilities,” HBR 1992– Upton, “What Really Makes Factories Flexible?” HBR 1995– Gilmore and Pine, “Four Faces of Mass Customization,” HBR 1997

Emerging consideration of service operations– Heskett, “Lessons of the Service Sector,” HBR 1987– Reichheld and Sasser, “Zero Defections: Quality Comes to Services,”

HBR 1990– Schlesinger and Heskett, “The Service-Driven Service Company,”

HBR 1991

Emerging Issues of Ops Strategy

Management of KNOWLEDGE Supply chain management Outsourcing and offshoring Education and training

– Moving up the food chain

Focus on core competencies versus Economies of scale

Implementing Implementing Operations Strategy: Operations Strategy:

Four ViewsFour Views

Implementing Operations Strategy

1. Strategy as Evolutionary Search

2. Strategic Differentiation

3. The Balanced Scorecard

4. Business Performance Excellence

Strategy as Strategy as Evolutionary SearchEvolutionary Search

Beinhocker “On the origin of strategies,” The McKinsey Quarterly, November 4, 1999.

The Origin of Strategies

“Evolution across a population is nature’s trick for mastering uncertainty. Businesses can use it to.”

Complex systems exhibit– Emergent patterns of behavior– Punctuated equilibrium– Path dependence

Can’t rely on patterns and predictions

Beinhocker, “On the origin of strategies,” The McKinsey Quarterly, Number 4, 1999.

Evolutionary Fitness Landscapes

Business strategy similar to evolutionary survival– Companies = Species– Business Strategies = Gene Combinations – Combination of genes (strategies) determine fitness

Some combinations work (survival) Others don’t work (extinction) Fitness landscape changes constantly


“Rugged Fitness Landscape”


Rules for Evolutionary Search

Never sit still Search in parallel Search strategies

– Marginal “hill climbing” (evolutionary)– Dramatic “pogo stick” jumps (revolutionary)– Use both

Devote some resources to risky experimentation “Can we afford not to?” vs. “Can we afford to?”


Strategic Strategic DifferentiationDifferentiation

Treacy and Wiersema, Discipline of Market Leaders, 1997

Models for Strategic Differentiation

Operational Excellence– Low/Best Total Cost

Best Total Solution– Customer Intimacy

Product Leadership – Best Products / Product Innovation

Operational Excellence

Provide unmatchable combination of price, quality, delivery, and ease of purchase

Execute extraordinarily well Value proposition is guaranteed best total

cost and hassle-free service Processes are optimized and streamlined to

minimize costs Culture abhors waste, rewards efficiency Organizational heroes are in operations

Operational Excellence

Focus on Productivity & Price Quality means consistency, conformance,

and reliability Timeliness means on-time delivery

PIF

ValueTQ

Best Total Solution Deliver to specific customer needs, not broad

market requirements Intimately know customers; know exactly what

products and services they need Continually tailor products and services to specific

customers at reasonable prices Customer loyalty a key asset; cultivate

relationships rather than pursue transactions Give customers more than they expect, constantly

upgrade product offerings Organizational heroes are in marketing & sales

Best Total Solution

Focus on Timeliness & Flexibility Timeliness means delivering on-demand Flexibility means “the customer is always right” Quality means service

P

IValue

FTQ

Product Leadership

Continually push products into unknown areas Strive to provide leading edge products or new

applications for existing products Commercialize new products quickly Business processes engineered for speed Relentlessly pursue product innovation Willing to quickly obsolete existing product Organizational heroes are engineers & scientists

Product Leadership

Focus on product Innovation Quality means performance, features, and

aesthetics Timeliness means rapid new product

introductions and planned obsolescence

P

FValue

ITQ

Without Strategic Differentiation

Operations– Focuses on price, and consistent quality

Marketing– Focuses on giving customers what they want

Engineering (R&D, product development)– Focuses on innovative new products

No consistent focus; organizational dysfunction; declining profits– Employees work harder & harder to achieve

less and less

Differentiation Life Cycle

ProductLeadership

Best TotalSolution

OperationalExcellence

Balanced ScorecardBalanced Scorecard

Kaplan & Norton, The Balanced Scorecard, 1996.

Balanced Scorecard

InternalBusinessMeasures

Innovation &LearningMeasures

CustomerMeasures

FinancialMeasures

How do customerssee us?

How do we lookto shareholders?

At what mustwe excel?

How to improve& create value?

Kaplan and Norton, “The Balanced Scorecard – Measures that Drive Performance,” Harvard Business Review, Jan/Feb 1992.

Financial Measures

Survive– Cash flow

Succeed– Quarterly sales growth– Operating income

Prosper– Increased market share– ROE


Customer Measures

New Products– Percent of sales from new products– Percent of sales from proprietary products

Benefits– Quality– Timeliness– Flexibility

Value


Internal Measures

Technological capability– Proprietary capabilities

Productivity– Traditional productivity measures

Internal quality– Scrap and reject rates

New product introduction– Schedule vs. plan


Innovation & Learning

Technology leadership– Time to develop next generation

Time to market– New product introduction vs. competition

Process improvement– Cost reduction, quality improvement– Improved customer service


Balanced Scorecard

InternalBusinessMeasures

Innovation &LearningMeasures

CustomerMeasures

FinancialMeasures

How do customerssee us?

How do we lookto shareholders?

At what mustwe excel?

How to improve& create value?

Visionand

Strategy?Kaplan and Norton, “The Balanced Scorecard – Measures that Drive Performance,” Harvard Business Review, Jan/Feb 1992.

Business Performance Business Performance Excellence (BPE)Excellence (BPE)

Dr. Jeff Luftig, Leeds School of Business

Typical Structure w/Out An Integrated Policy

Deployment System

Initial Result Achieved After Implementing a Policy Deployment System

Final Result Achieved After Implementing a Policy Deployment System

Purpose of Policy Deployment:Establishing the ‘Point of the Compass’

Steps of Policy Deployment Create Vision, Mission, and Value Proposition

– Vision looks out 5-10 years– Mission looks out 3-5 years– Value Proposition explains why customers will

purchase from us instead of competition

Decide upon a Model for Strategic Differentiation Develop key performance measurements that will

realize the Mission, Vision, and Value Proposition Deploy to the organization

– Easy to say, hard to accomplish!

Rules for Vision & Mission

1. Never state anything that you do not intend to measure, and subsequently allocate resources to achieve.

2. If it is critical to your organization, always state it.

3. Never state anything that makes the management team look foolish.

Metal Surface FinisherVision

The vision of ABC is to be regarded as among the best surface finishers

in the country for the services we choose to provide.

Mission

Achieve near-term profitability by providing high quality surface finishing and

related technical services to companies where surface finishing is significant

to the success of their businesses, while maintaining environmentally sensitive

and safe operations.

Value Proposition

ABC provides surface finishing with the highest product quality and value-added

technical services, to deliver the lowest total cost solution for our customers.

Strategic Differentiation

Operational Excellence -- Provide customers with reliable products or services at

competitive prices and delivered with minimal difficulty or inconvenience.







Models for Strategic Differentiation

Operational Excellence– Low/Best Total Cost

Best Total Solution– Customer Intimacy

Product Leadership – Best Products / Product Innovation







Metal Surface FinisherVision

The vision of ABC is to be regarded as among the best surface finishers

in the country for the services we choose to provide.

Mission

Achieve near-term profitability by providing high quality surface finishing and

related technical services to companies where surface finishing is significant

to the success of their businesses, while maintaining environmentally sensitive

and safe operations.

Value Proposition

ABC provides surface finishing with the highest product quality and value-added

technical services, to deliver the lowest total cost solution for our customers.

Strategic Differentiation

Operational Excellence -- Provide customers with reliable products or services at

competitive prices and delivered with minimal difficulty or inconvenience.

Construct Analysis

Constructs Level I CPM's

Regarded as among the best surface finishers in the country

Reputation with target customers

Lowest total cost solution Profit

Near-term profitability Costs

Revenues

High quality surface finishing Product quality

Highest product quality

Environmentally sensitive operations

Environment compliance

Safe operations Safety compliance







Fault Tree ConstructionVision/Mission/Value Prop

Level I CPMs

Level II

Level III

Level IV

CPM Breakdown

Revenue– Revenue by production line

• Revenue by customer

Costs– Costs by production line

• Costs by operator• Costs by product type• Costs by customer

Continue for all Level I CPMs

Issues & Problems with BPE

Difficult to understand, explain in places Still relies on managerial judgment and

insight! Cannot fix a bad top-level strategy More difficult to implement than it looks Cannot overcome poor implementation HARD WORK!

The Promise of BPE

We have the tools:– JIT, TOC, SPC, MRP, ERP, EOQ, ABC, …– Many other TLA’s (three letter acronyms)

Too often we have a hammer looking for something to pound – anything!

BPE works to constructively focus efforts on profitability and success!

Benefits of BPE

BPE PolicyDeployment

Launched

Operations StrategyOperations Strategy

Leeds School of BusinessLeeds School of BusinessUniversity of ColoradoUniversity of ColoradoBoulder, COBoulder, CO

Professor Stephen Lawrence

Documents

Operations Strategy Leeds School of Business