Strategic Planning and Decisions in Operations[1].Pptx Session 2

8/8/2019 Strategic Planning and Decisions in Operations[1].Pptx Session 2

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Strategic Planning and Decisionsin Operations/Organizations

Operation Strategies

http:// wps.pearsoned.co.uk


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Porter s Generic strategies

Porter (1980) classifies three genericstrategies:

1. Overall Cost Leadership2. Differentiation3. Focus.


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Overall Cost Leadership

Low costHigh product availability

Usually off the shelf


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Differentiation

High qualityInnovative in product design

Flexible


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Focus

Market segmentation in terms of meetingthe special needs of a particular market ,providing lower costs for that market segment, or both.While the overall cost leadership anddifferentiation are industry wide strategies ,but market segmentation by definition appliesto only a portion of the market


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Only one of these strategies is usuallyemployed by a particular business unit;however , different strategies can and shouldbe employed by different business unitswithin the same company.


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Usually the cost leadership strategy alsoinvolves production to stock since part of thestrategy is to make the product available off the shelf.Economies of scale are usedLearning and experience curve are usedLow cost and product availability drives theentire strategy./entire organization.


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Q uality , service and flexibility are not ignored;however they are not the emphasis

Low cost strategy provides an entry barrier interms of economies of scale and costadvantages.Even product substitutes have a more difficulttask in competing because of low cost andavailability.


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Provides bargaining power in relation topotential vertical integration of both supplierand buyer for the efficient producer incomparison to less efficient producer.E.g: kodak photographic film; TexasInstruments silicon chips;


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Risks of cost leadership

Production system becomes inflexibleIf consumer preference take a sharp turn or if

technology changes product design theplant , equipment obsolete the enterprise mayhave to reinvest huge sums in order torecover. (ford car once the least costproducer not able to cope up changedenvironment )


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Differentiation

The firm attempts to differentiate itself fromthe pack by offering something that isperceived by the industry (and its customers)as being unique.Could be high quality (rolls royce/benz) ,innovation (hewlet packard) or willingness tobe flexible in product designs (ferrari).The above has implication on productionsystem design.


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The requirement is to be flexible in order to copewith the demands on the system.Brand image is important in this strategy.

Other ways to differentiate your self is alsopossible a strong dealer network (zenith),an extremely well designed distribution system

(Gillette). Or excellent service.

This strategy also does not ignore cost just as costleadership does not ignore quality , but the thrustis on differentiation/uniqueness.


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Advantages - differentiation

Comparatively less competition both directas well as from substitutes Customers have brand loyalty, and thereforeless sensitive to pricedraws higher margins so higher costs areless important

Barriers to entry are there.Less threat from suppliers forward integrationdue to higher margins.


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Risks - differentiation

Customers can tolerate only a limitedpremium.

If costs of providing uniqueness become moreand beyond the customers willingness to pay ,then this turns into disadvanatageNew technology can through the product outof market


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Market segmentation-Focus

Not industry wide only a select customergroup is focused

Either low cost or uniquenessNiche market by providing a good service.Manufacturing facilities must be flexible to

handle all types , sizes and volume.Likely to have weakness financially to take ongiants.


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Experience curve

It is an established fact in manufacturing that , asexperience is gained through production, unitcosts are reduced.Originally , this cost improvement was attributedto a learning effect among workers such as thedivision of labor effect noted by Adam Smith

(development of skill when a single task is donerepetitively ), now however it is recognized asresulting from a wide variety of factors such as


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Such as changes in production methods andtools , improved product design from thepoint of producibility , standardization,changes in layout, and improved flow ,economies of scale , better inventory control,improved scheduling and plant utilization and

improvements in organizations.


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It is also called learning curve.Noticed first in aircraft industry study

revealed that each doubling of cumulativetotal output unit costs reduced by 20%.Thus the second unit costs only 80%, fourthunit , costs 80% of second , the hundredthunit costs 80% of the fifth and so on.


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Copyright Houghton MifflinCompany. All rights reserved. 4 | 20

Economies and Diseconomies of Scale

Figure 4.2


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Learning EffectsLearning Effects are cost savings that come fromlearning by doing.

Labor productivityLearn by repetition how to best carry out the task

Management efficiencyLearn over time how to best run the operation

Realization of learning effects implies adownward shift of the entire unit cost curve

As labor and management become more efficient over time at every level of output


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The Impact of Learning and ScaleEconomies on Unit Costs

Figure 4.3


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The Experience Curve

The Experience Curve is the systematic lowering of thecost structure and consequent unit cost reductionsthat occur over the life of a product

St ra t egic significance of th e experience curve:Increasing a companys produc t volume and

marke t s h are will lower i t s cos t s t ruc t urerela t ive t o i t s rivals.


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The Experience CurveFigure 4.4


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Flexible Manufacturingand Mass Customization

Flexible Manufacturing Technology Lean Production technology that:

Reduces setup times for complex equipmentImproves scheduling to increase use of

individual machinesImproves quality control at all stages of themanufacturing processIncreases efficiency and lowers unit costs

Mass Customization Ability to use flexible manufacturing technology toreconcile two goals that were once thought incompatible :

Low cost and Differentiation through product customization


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Tradeoff Between Costs andProduct Variety

Figure 4.5


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Experience curve is particularly important inproductivity improvement results during rapiddevelopment and mature phases of the product

life cycle, usually when the system is productfocused.1. First the firm that has the largest market share

will produce the largest number of units and

hence will have the lowest cost.( even when allthe firms have the same percentage of experience curve)


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2. Second , if through process technologyadvantages a firm can establish itself on alower percentage experience than competitor, it will have lower unit costs, even if both thefirms have the same cumulative output.

3. Third a firm with greater experience can useaggressive price policy as a competitiveweapon to gain an even greater market share .


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4. Fourth , a firm can use aggressive process technology policyby allocating resources towards mechanization in earlierstages and automation in latter stages of growth tomaintain its position on the experience curve or to improve

the slope of its experience curve.This strategy is particularly important in the mature phase of product life cycle where competition is focused on cost.

But, the limitation of this experience curve is that benefitsfinally run out simply because of product obsolescence asindicated by the product life cycle curve. ( as even beforematurity is reached cost reductions due to experiencecurve will provide smaller and smaller returns)


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Role of productivity improvement

In order to remain competitive , a firm mustcontinually seek ways of reducing costs;

It is largely through operations strategy thatproductivity improvement becomesimplemented.


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The six basic components of operations strategy

All of the activities in the line of material flowfrom suppliers through fabrication and assemblyand culminating in product distribution must beintegrated for sensible operations strategyformulation .

Leaving any part out can lead to uncoordinated

strategies. In addition to materials , the othercrucial inputs of labor, job design and technologypart must be parts of operations strategy.


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The six components of operations strategyare;

1. Positioning the productive system2. Capacity /location decisions3. Product and process technology4. Workforce and job design5. Strategic implications of operating decisions6. Suppliers and vertical integration


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These components are basic to operationsstrategy because there is a wide managerialchoice available within each and each affectsthe long term competitive position of the firmby impacting cost , quality , productavailability and flexibility/service.


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1.Positioning the productive system

If the production is not made a part of corporatestrategy, then the likely hood of mismatch betweensystem and market is high with resulting conflicts,usually between production and marketing functions.A firm without a unified strategy that includes theoperations function is likely to anticipate obtaining lowcost, high quality, product availability andflexibility/service from its production system all at thesame time , not realizing that there are trade offsbetween them and one can not optimize all thesedimensions simultaneously.


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A firm that is attempts to be all things in itsproduction system is likely to compromise allfour dimension of production competence andend up stuck in the middle with lowmargins.


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Product Process Strategies

As the product develops through its life cycle , theproduction system goes through a life cycle of itsown, from a job shop system (product focused ,

to order) when the product is in its initial stagesthrough intermediate stages to a continuoussystem (product focused, to stock) when theproduct is demanded in larger volume.

These stages of product and processdevelopment are interdependent and feed oneach other


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Page 735 buffa book figure 22.4


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Where managers strategy is focused onproviding service, high quality and meetingcustomers individual needs, combinationsbetween product volume and productivesystem types are below the line ( in figuregiven) may be appropriate.

Probably combined with production to order.


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On the other hand if the managers strategy isfocused on price and off the shelf availability ,combinations above the line (in figure given)may be appropriate, combined with a tostock production system.Examples of Joint strategies LynchburgFoundry having five different Plants in Virginiaand surrounding areas.


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Again a strategy can never remain static overlong periods.A

s products or services mature in their lifecycles , consumer preferences become known, design become refined and volumes buildand the appropriate joint strategies mustreflect these changes.


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Focus

The example of Lynchburg foundry each plantfocusing on different customer groups can be anexample - the focused factory specialized

factory.To summarize all the elements of operationsstrategy are important and all need to be woventogether to form a coordinated strategy, if the

positioning of the system is wrong , theoperations strategy will be ineffective.Positioning is the Key .


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Making Capacity/Location Decisionsstrategic

Videotape prices in the US A and elsewhere beganto decline rapidly in 1982 when Fuji photo film ,Hitachi Maxell and TDK collectively increasedcapacity by over 90% . This massive increaseincapacity was installed just as industry wideannual growth rates in sales declined to arelatively modest 40%. While consumersbenefitted out of low prices , the supply demand

imbalance created havoc in industry and it wasexpected that the over capacity would not beabsorbed for at least next two years.


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Maruthi is putting up a Plant in Manesar witha capacity to produce another2,50,000 cars inthe same existing campus.For whom is this message directed at ?

Discuss Gujarath Ambuja Cement Case study


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In March 1983, Domitar Incorporated , Canada slargest maker of fine papers announced that itwould double the capacity of its paper mill inWindsor , Q uebec. The announcement was quitefactual , but it indicated that the mill to beenlarged was operating at loss. In addition theannouncement stated that the mill benefitshowever from a good wood supply and is near

the U S Border for increased access to thatmarket. It provides the best location forsignificant increases in productive capacity.


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The above announcement suggests theimportance of capacity/location decisions.Has an impact on the amount of capital beingspent and has strategic importance.Risks are great because future demand isuncertain.Competitors behaviour is equally important.


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For example if too many competitors addcapacity , all the firms in the industry willsuffer.

Once installed new capacity remains and theover capacity will be a problem in future.Where to expand , how to counter

competitors moves?How to tie the new capacity to the distributorsnetwork effectively.


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Excess capacity is a curse, except whereexplosively increasing demand is certain.

New technologies come which can lower thecost.

If exit barriers are high , the existingtechnology is likely to remain in productionand prolong the agony of over capacity.


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Work force and job design

There is a strong tie between the work force and job design and operations strategy.Labour is the key input to all dimensions of production system ; cost , quality, dependabilityand flexibility in service.Labor management relationship is extremely

important in operations strategy.Employment in manufacturing will decline in thenext 10 20 years , but still an important input.


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Making operating decisions strategic

Japanese have taught the world that creatingeffective operating system is having a significantimpact on cost and quality.JIT production- small lot sizes worker producesand passes it on to second worker. Second workerreports on the defect immediately. First worker ismotivated to discover the cause and further scrapaccumulation is avoided. Each pair of operation is

highly linked and awareness of interdependenceof two workers is enhanced. Constantimprovements improves quality and reduces cost.


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Strategies regarding suppliers andvertical integration

Supplier relatioship arms length (usa) close(japan)- keiretsu/jitSince supplier processes are really anextension of manufacturing process thequestion of whether or not to integratebackwards and producing the component in

house is to be considered.


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The wheel of operations strategy to beinserted.


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implementation

Developing SBU Plans for operations: 4 steps;1. Analyze the situation the operations audit.

2. Develop strategic alternatives3. Select a strategy in harmony with the

enterprise strategy.

4. Formulate detailed plans and budgets toimplement the strategy.


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The purpose of audit is to take stock of thesituation of the operations function.Status on six basics of operations strategy

1. Positioning2. Process flow and technology3. Capacity / location decisions

4. Workforce and job design5. Operating decisions6. Suppliers and vertical integration.


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Assign priority weightsDevelop strategic alternatives

Revise the planned levels in view of findingsSelect a strategyImplement the strategy


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Operations strategy is also concerned withsetting broad policies and plans for using theresources of a firm to best support its long

term strategy.It has to be aligned with firms corporatestrategy.Operations strategy pertains to decisions thatrelate to the design of a process , and theinfrastructure needed to support the process.


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The process design includes the selection of appropriate technology , sizing the processover time , the role of inventory in the processand locating the process. The decisions alsocover logic associated with the planning , andcontrol system , quality assurance and control

approaches, work payment structures andorganization of operational function and inalignment with changing customer needs.


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Competitive dimensions

Which product or service to produce?

Cost / priceQ uality / differentiation/serviceDelivery speed

Delivery reliabilityCoping with change in demand/dynamic marketFlexibility and speed of introduction of newproduct .


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Trade offs

Concept of trade off among its various strategieswhich are required to be aligned with the firmscompetitive strategy.

Straddling - a firm trying to match the benefits of a successful position while maintaining itsexisting position. E.g; continental airlines

failure.when it is already succesful as a fullservice airline tried in point to point routes of its rival ending up as a failure.


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Order winners Vs order qualifiers.Strategic fit

Productivity measurement measures.

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Strategic Planning and Decisions in Operations[1].Pptx Session 2