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Learning Objectives• List and briefly discuss the primary ways that business
organizations compete
• List five reasons for the poor competitiveness of some companies.
• To understand how customer wants and needs drive strategic thinking in a firm, and their consequences in designing and managing operations within the value chain.
• To learn the five major competitive priorities important to business success, and what they mean for operations.
• Define the term strategy and explain why strategy is important for competitiveness.
• Discuss and compare organizational strategy and operations strategy, and explain why it is important to link the two.
• To understand the process of strategic planning at the organizational level and its relationship to operations strategy.
• To understand how operations strategy can support and drive the achievement of organizational objectives, and to learn the key elements of an operations strategy.
• To understand the operations design choices and infrastructure decisions from the perspective of defining an operations strategy, and tradeoffs that need to be made in developing a viable operations strategy.
• Describe and give example of time-based strategies.
• Define the term productivity and explain why it is important to organizations and to countries.
• A Framework for Manufacturing Strategy
• List some of the reasons for poor productivity and some ways of improving it.
• To be able to identify and understand the seven decisions areas in Hill’s operations strategy framework.
• To be able to analyze a real organization's operations strategy and apply the strategy development framework.
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Competitiveness:
How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services
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Businesses Compete Using Marketing
Identifying consumer wants and needs Pricing Advertising and promotion
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Businesses Compete Using Operations
Product and service design Cost Location Quality Quick response
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Businesses Compete Using Operations
Flexibility Inventory management Supply chain management Service and service quality Managers and workers
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Why Some Organizations Fail
Too much emphasis on short-term financial performance
Failing to take advantage of strengths and opportunities
Neglecting operations strategy Failing to recognize competitive threats
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Why Some Organizations Fail
Too much emphasis in product and service design and not enough on improvement
Neglecting investments in capital and human resources
Failing to establish good internal communications
Failing to consider customer wants and needs
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Mission/Strategy/Tactics
How does mission, strategies and tactics relate todecision making and distinctive competencies?
Strategy TacticsMission
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Strategy
Mission The reason for existence for an organization
Mission Statement States the purpose of an organization
Goals Provide detail and scope of mission
StrategiesPlans for achieving organizational goals
Tactics The methods and actions taken to accomplish strategies
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Planning and Decision Making
Mission
Goals
Organizational
StrategiesFunctional Goals
Finance Strategies
MarketingStrategies
OperationsStrategies
Tactics Tactics Tactics
Operatingprocedures
Operatingprocedures
Operatingprocedures
Figure 2.1
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Strategy Example
Rita is a high school student. She would like to have a career in business, have a good job, and earn enough income to live comfortably
Mission: Live a good life Goal: Successful career, good income Strategy: Obtain a college education Tactics: Select a college and a major Operations: Register, buy books, take
courses, study, graduate, get job
Example 1
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Examples of Strategies
Low cost Scale-based strategies Specialization Flexible operations High quality Service
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Strategy and Tactics
Distinctive CompetenciesThe special attributes or abilities that give anorganization a competitive edge.
Strategy Factors Price Quality Time Flexibility Service Location
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Banks, ATMsConvenienceLocation
DisneylandNordstroms
Superior customer service
Service
Burger KingSupermarkets
VarietyVolume
Flexibility
Express Mail, Fedex,One-hour photo, UPS
Rapid deliveryOn-time delivery
Time
Sony TVLexus, CadillacPepsi, Kodak, Motorola
High-performance design or high quality Consistent quality
Operations StrategyUnderstanding Customer Wants and Needs
A Japanese professor, Noriaki Kano, suggested three classes of customer requirements:
Dissatisfiers: requirements that are expected in a good or service. If these features are not present, the customer is dissatisfied, sometimes very dissatisfied.
Satisfiers: requirements that customers say they want.
Exciters/delighters: new or innovative good or service features that customers do not expect.
• Basic customer expectations - dissatisfiers and satisfiers – are generally considered the minimum performance level required to stay in business and are often called order qualifier.
• Order winners are goods and service features and performance characteristics that differentiate one customer benefit package from another, and win the customer's business.
• Search attributes are those that a customer can determine prior to purchasing the goods and/or services. These attributes include things like color, price, freshness, style, fit, feel, hardness, and smell.
• Goods such as supermarket food, furniture, clothing, automobiles, and houses are high in search attributes.
• Credence attributes are any aspects of a good or service that the customer must believe in, but cannot personally evaluate even after purchase and consumption.
• Examples would include the expertise of a surgeon or mechanic, the knowledge of a tax advisor, or the accuracy of tax preparation software.
Source: Adapted from V. A. Zeithamel, “How Consumer Evaluation Processes Differ Between Goods and Services,” in J. H. Donnelly and W. R. George, eds., Marketing in Services, published by the American Marketing Association, Chicago, 1981, pp. 186–199.
Customers evaluate services in ways that are often different
From goods such as:
• Customers seek and rely more on information from personal sources than from non-personal sources when evaluating services prior to purchase.
• Customers use a variety of perceptual features in evaluating services. Customers normally adopt innovations in services more slowly than they adopt innovation in goods.
• Customers perceive greater risks when buying services than when buying goods.
• Dissatisfaction with services is often the result of customers’ inability to properly perform or co-produce their part of the service.
These insights help to explain why it is more difficult to design
servicesand service processes than goods and manufacturing
• Competitive advantage denotes a firm’s ability to achieve market and financial superiority over its competitors.
• Competitive priorities represent the strategic emphasis that a firm places on certain performance measures and operational capabilities within a value chain.
• Almost every industry has a low price market segment.
• Low-cost strategy firms: Honda Motor Co., Marriott's Fairfield Inns, Merck-Medco On-line Pharmacy, Southwest Airlines, and Wal-Mart's Sam's Club.
• Southwest Airlines is one of the few airlines that have been profitable during the 2001-2005 period. A low cost strategy can reshape industry structure such as in the airline industry (see OM Spotlight: Southwest Airlines).
Competitive strategies often led to tradeoffs between quality and
cost; some company strategies are willing to sacrifice quality in order
to develop a low cost advantage. Consider the story of Schlitz Brewing
Company below.
• In the early 1970s, Schlitz Brewing Company, the second largest brewer in the United States, began a cost-cutting campaign. It included reducing the quality of ingredients in their beers by switching to corn syrup and hop pellets and shortening the brewing cycle by 50 percent.
• In the short term, it achieved higher returns on sales and assets than Anheuser-Bush (and the acclaim of Wall Street analysts).
• But customers do recognize inferior products. Soon after, market share and profits fell rapidly.
• By 1980 Schlitz's sales had declined 40 percent, the stock price fell from $69 to $5, and the company was eventually sold.
• Time is perhaps the most important source of competitive advantage.
• Customers demand quick response, short waiting times, and consistency in performance.
• Many firms use time as a competitive weapon to create and deliver superior goods and services such as Charles Schwab, Clarke American Checks, CNN, Dell, FedEx, and Wal-Mart.
• Reductions in processing (flow) time serve two purposes.
• First, they speed up work processes so that
customer response is improved. Deliveries can be made faster, and more often on-time.
• Second, reductions in processing time can only be accomplished by streamlining and simplifying processes and value chains to eliminate non-value-added steps such as rework and waiting time.
• Processing (flow) time reductions often drive simultaneous improvements in quality, cost, and productivity (see OM Spotlights on Hyundai Motor Co. and Procter & Gamble).
• Mass customization requires companies to align their activities around differentiated customer segments and design goods, services, and operations around flexibility.
• High-levels of flexibility might require special strategies such as modular designs, interchangeable components, and postponement strategies.
• Flexible operations require sharing manufacturing lines and specialized training for employees.
• Flexible operations may also
require attention to outsourcing decisions, agreements with key suppliers, and innovative partnering arrangements, because delayed shipments and a complex supply chain can hinder flexibility.
• Mass customization is being able to make whatever goods and services the customer wants, at any volume, at any time for anybody, and for a global organization, from any place in the world.
• Strategy is a pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole.
• Effective strategies develop around a few key competitive priorities - such as low cost or fast service time - which provide a focus for the entire organization, and exploit an organization’s core competencies - the strengths unique to that organization.
• Strategic planning is the process of determining long-term goals, policies, and plans for an organization.
• The businesses in which the firm will participate are often called strategic business units (SBUs), and are usually defined as families of goods or services having similar characteristics or methods of creation.
• Strategy is the result of a series of hierarchical decisions about goals, directions, and resources.
• Corporate strategy is necessary to define the businesses in which the corporation will participate and develop plans for the acquisition and allocation of resources among those businesses.
• A business strategy defines the focus for SBUs. The major decisions involve which markets to pursue and how best to compete in those markets; that is, what competitive priorities the firm should pursue.
• A functional strategy is the set of decisions that each functional area - marketing, finance, operations, research and development, engineering, and so on - develops to support its particular business strategy.
• The operations strategy is how an organization’s processes are designed and organized to produce the type of goods and services to support the corporate and business strategies.
• Managers recognize that the value (supply) chain can be leveraged to provide a distinct competitive advantage, and that operations is a core competency for the organization.
• Whoever has superior operational capability over the long term is the odds-on-favorite to win the industry shakeout.
• Strategy development refers to a company's approach, formal or informal, for making key long-term business decisions.
• The process typically takes into account customer and market requirements, the competitive environment, industry structure and non-industry competitors, financial and societal risks, human resource capabilities and needs, technological capabilities, and supplier capabilities.
• An operations strategy defines how an organization will execute its chosen business strategies.
• Developing an operations strategy involves translating competitive priorities into operational capabilities by making a variety of choices and trade-offs for design and operating decisions.
• An operations strategy defines how an organization will execute its chosen business strategies.
• Operating decisions must be aligned with achieving the desired competitive priorities.
• For example, if corporate objectives are
to be the low cost and mass market producer of a good then adopting an assembly line type of process is how operations can help achieve this corporate objective.
Prof. Hill’s Strategy Framework Applied to McDonald’s
• McDonald's vision is to be the world's best quick service restaurant experience. Being the best means providing outstanding quality, service, cleanliness and value, so that we make every customer in every restaurant smile. To achieve our vision, we focus on three worldwide strategies:
(1)Be The Best Employer(2)Deliver Operational Excellence(3)Achieve Enduring Profitable Growth
• Customer Benefit Package Design and Strategy (see Exh. 4.7)
• Strategy Development for McDonald’s (see Exhibit 4.8)
Strategy: We strive to provide our customers with superior: customer convenience (location, food, communication, schedules, etc.) clean facilities, equipment, uniforms, parking lot, and the like friendly professional staff that care about you ways to improve and maintain your body and mind's health and well being.
Mission: The mission of our health club is to offer many pathways to a healthy living style and body.
Competitive Priorities: #1 Priority – many pathways to healthy living and a healthy body (design flexibility), #2 – friendly professional staff and service
encounters (service quality), #3 everything is super clean (goods and environmental quality), #4 – customer convenience in all respects (time), #5 – price (cost).
How to win customers? Providing a full service health club with superior service, staff, and facilities.
• The food ordering and supply, preparation, delivery, and clean up processes define the food service value chain.
• The childcare process includes rigorous procedures for checking children in and out of the childcare area.
• The swimming lesson process includes a sign-up phase, potential participant medical examination phase, and a series of classes taught by certified swimming instructors who are trained in emergency services such as CPR.
• The personal trainer process requires high design flexibility since each exercise and training program is customized to the individual.
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Kaplan and Norton’s Generic Strategy Map
In the Kaplan and Norton’s Generic Strategy
Map, under the Financial Perspective, the
Productivity Strategy is generally made up from
two components:
1. Improve cost structure: Lower direct and indirect costs
2. Increase asset utilization: Reduce working and fixed capital
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Kaplan and Norton’s Generic Strategy Map (Continued)
In the Kaplan and Norton’s Generic Strategy
Map, under the Financial Perspective, the
Revenue Growth Strategy is generally made
up from two components:
1. Build the franchise: Develop new sources of revenue
2. Increase customer value: Work with
existing customers to expand relationships with company
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Kaplan and Norton’s Generic Strategy Map (Continued)