Operations Strategy

Learning outcomes
At the end of the session students should be able to:

Identify global challenges facing operations manager and

the 6 main reasons to globalize
Define mission and strategy
Define an operations strategy and its role as a source of
competitive advantage in a global marketplace
Identify and explain three strategic approaches used in
operations as a source of competitive advantage
Identify issues in operations strategy
Identify and explain four global operations strategy options
 Global view of operations
Operations managers today must have a global view of
operations strategy
Advance in technology, reliable shipping and cheaper
communications – growth in world trade and global capital
markets – organizations are quickly extending their
operations globally with innovative strategies
Globalization means that domestic (local) production and
exporting may no longer be a viable business model
 Reasons to globalize

6 main reasons domestic business operations decide to

change to some form of international operation, ranging
from tangible to intangible

Tangible Reasons to Globalise

Reasons 1. Reduce costs (labour, taxes, tariffs, etc.)
2. Improve supply chain
3. Provide better goods and services
Intangible 4. Understand markets
Reasons 5. Learn to improve operations
6. Attract and retain global talent
 1. Reduce cost
Foreign locations with lower wage rates - lower direct and
indirect costs
Less stringent regulations on wide variety of operations
practices - reduce costs
Cut cost of taxes and tariffs
Shifting low-skilled jobs to another country has several
potential advantages
Trade agreements also helped to reduce tariffs thus reducing
cost of operating facilities in foreign countries
 2. Improve the supply chain

Supply chain can be improved by locating facilities

closer to where unique resources are available
– Auto design to California
– Perfume manufacturing in France
 3. Provide better goods and services
Characteristics of goods can be objective and measurable
(e.g. no of on-time deliverables) can also be subjective
and less measurable (e.g. sensitivity to culture)
– On-time deliveries
– Cultural variables
– Improved customer service
 4. Understand markets

Interacting with foreign customers and suppliers can

lead to new opportunities
Knowledge of market helps firms understand where
market is going and also helps to diversify customer
base, production flexibility
Extend the product life cycle
 5. Learn to improve operations

Remain open to free flow of ideas

– General Motors partnered with a Japanese auto
manufacturer to learn – built auto assembly plant in
California
– Strategy allows GM to contribute capital and
knowledge of US labour laws – Japanese contributed
production and inventory ideas
6. Attract and retain global talent

Offer better employment opportunities

– Better growth opportunities and insulation
against unemployment
– Relocate unneeded personnel to more
prosperous locations
 Cultural and ethical issues

Cultures can be quite different

Attitudes can be quite different towards:
– Punctuality
– Lunch breaks
– Environment
– Intellectual property
– Thievery
– Bribery
– Child labour
 Companies may wish to consider

National literacy rate Work ethic

Rate of innovation Tax rates
Rate of technology Inflation
change Availability of raw
Number of skilled materials
workers Interest rates
Political stability Population
Product liability laws Number of miles of
Export restrictions highway
Variations in language Phone system
 Class discussion: Ethical dilemma

Major corporations with overseas subcontractors (such as

Ikea in Bangladesh, Unilever in India and Nike in China)
have been criticised often, with substantial negative publicity,
when children as young as 10 have been found working in
subcontractor’s facilities. The standard response is to
perform an audit and then enhance controls so it does not
happen again. In one such case, a 10 year old was
terminated. Shortly, thereafter, the family, without the 10 year
old’s income, lost its modest home, and the 10 year old was
left to scrounge in the local dump for scraps of materials.
Was the decision to hire the 10 year old ethical? Was the
decision to terminate the 10 year old ethical?
Mission and strategy
Developing mission and strategy

Mission statements tell an

organization where it is going

The Strategy tells the organization

how to get there
 Mission
Mission - where are you going?
Organization’s purpose for being
Answers ‘What do we provide society?’
Provides boundaries and focus
 Example mission: FedEx

FedEx is committed to our People-Service-Profit philosophy.

We will produce outstanding financial returns by providing
total reliable, competitively superior, global air-ground
transportation of high priority goods and documents that
require rapid, time-certain delivery. Equally important,
positive control of each package will be maintained using real
time electronic tracking and tracing systems. A complete
record of each shipment and delivery will be presented with
our request for payment. We will be helpful, courteous, and
professional to each other and the public. We will strive to
have a completely satisfied customer at the end of each
transaction.
 UWI’s Mission
To advance learning, create knowledge and foster
innovation for the positive transformation of the
Caribbean and the wider world.
 Factors affecting mission

Philosophy
and Values

Profitability
Environment and Growth

Mission

Customers Public Image

Benefit to
Society
 Strategy

After mission is established – strategy implementation can

begin
Action plan to achieve mission
Functional areas have strategies
Strategies exploit opportunities and strengths, neutralize
threats, and avoid weaknesses
 Strategy in an organization

Corporate
strategy

Business
strategy

Functional
strategy

Marketing Operations
Financial
 Strategies for competitive advantage
Firms achieve missions in 3 conceptual ways:
– Differentiation
– Cost leadership
– Response
Each of the 3 strategies provides an opportunity to achieve
competitive advantage
Competitive advantage – the creation of a unique advantage
over competitors
– Idea – create customer value in efficient and sustainable way
Most cases – combination of strategies used
Competitive strategy is about being different – it means
deliberately choosing a different set of activities to deliver a
unique mix of value
E.g. Southwest Airlines – low cost, point to point service
between midsize cities and secondary airports in large cities
 Strategies for competitive advantage
Differentiation – better, or at least different
Cost leadership – cheaper
Response – rapid response
 1. Competing on differentiation
Differentiation – concerned with providing uniqueness
Distinguishing the offerings of an organisation in such a way
that the customer perceives as adding value
Uniqueness can go beyond both the physical characteristics
and service attributes to encompass everything that impacts
customer’s perception of value
– Service sector – one option for extending product
differentiation is through an experience
Experience differentiation – engaging customer with a
product through imaginative use of the 5 senses, so the
customer ‘experiences’ the product
– Walt Disney Magic Kingdom – experience differentiation
 2. Competing on cost
Low-cost leadership – achieving maximum value as perceived
by customer
Does not imply low value or quality
One driver of low-cost strategy – facility that is effectively
utilised
Example:
Wal-Mart
– Superstores, open 24 hours a day
– Small overheads, shrinkage, distribution costs
– Rapid transportation of goods, reduced warehousing costs
and direct shipment from suppliers – high inventory
turnover – low cost-leader
 3. Competing on response
Response – a set of value related to rapid, flexible, and
reliable performance
– Include entire range of values related to timely product
development and delivery, as well as reliable
scheduling and flexible performance
Flexibility is matching market changes in design innovation
and volumes
Reliability is meeting schedules
Timeliness is quickness in design, production, and delivery
 Competitive dimensions
Cost or price – ‘Make the product or deliver the service
cheap’
Quality – ‘Make a great product or deliver a great service’
Delivery speed – ‘Make product or deliver the service
quickly’
Delivery reliability – ‘Deliver it when promised’
Coping with changes in demand – ‘Change its volume’
Flexibility and speed of new product introduction –
‘Change it’
 Notion of trade-offs
Central to concept of operations strategy is the notion of
operations focus and trade-offs
Underlying logic – operations cannot excel simultaneously
on all competitive dimensions
So management has to decide which parameters of
performance are critical to firm’s success and then
concentrate resources on these
 Operations strategy and the strategic
OM decisions
Main objective of manufacturing strategy is to:
1. translate required competitive dimensions (obtained from marketing)
into specific performance requirements for operations and
2. make the plans necessary to ensure that operations capabilities are
sufficient to accomplish them
Differentiation, low cost and response – can be achieved when managers
make effective decisions in 10 areas of OM
Collectively known as operations decisions
These 10 OM decisions support missions and implement strategies
– Goods and service design
– Quality
– Process and capacity design
– Location selection
– Layout design
– Human resources and job design
– Supply chain management
– Inventory
– Scheduling
– Maintenance
 Operations decisions
Goods and service design
– Designing goods and services defines the production process
– Costs, quality and HR decisions often determined by design decisions
– Design usually determines costs and quality
Quality
– Customer’s quality expectations determined and policies and procedures
established to identify and achieve that quality
Process and capacity design
– Process decisions commit management to specific technology, quality, HR
use and maintenance
– These expenses and capital commitments determine firm’s basic cost
structure
Location selection
– Facility location decisions may determine firm’s ultimate success
– Errors made here may affect other production efficiencies
Layout design
– Material flows, capacity needs, personnel levels, technology decisions and
inventory requirements influence layout
HR and job design
– People – integral part of the total system design
– Quality of work life , talent and skills – these costs must be determined
 Operations decisions
Supply chain management
– Decisions determine what is to be made and purchased
– Considerations given to quality, delivery, innovation
Inventory
– Can be optimised only when customer satisfaction, supplier
production schedules and HR planning are considered
Scheduling
– Feasible and efficient schedules of production must be
developed
– Demands of HR and facilities must be determined and
controlled
Maintenance
– Decisions must be made regarding desired levels of reliability
and stability and systems must be established to maintain
these

Op managers implement these 10 decisions by identifying key tasks

and staffing needed to achieve them
 Operations strategies for 2 drug
companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Product Differentiation Low Cost
Advantage
Product Heavy R&D investment; Low R&D investment;
selection and extensive labs; focus on focus on development of
design development in a broad generic drugs
range of drug categories
Quality Major priority, exceed Meets regulatory
regulatory requirements requirements on a country
by country basis

Process Product and modular Process focused; general

process; long production processes; “job shop”
runs in specialized approach, short-run
facilities; build capacity production; focus on high
ahead of demand utilization
 Operations strategies for 2 drug
companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Product Differentiation Low Cost
Advantage
Location Still located in the city Recently moved to low-
where it was founded tax, low-labour-cost
environment

Scheduling Centralized production Many short-run products

planning complicate scheduling

Layout Layout supports Layout supports process-

automated product- focused “job shop”
focused production practices
 Operations strategies for 2 drug
companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Product Differentiation Low Cost
Advantage
Human Hire the best; nationwide Very experienced top
Resources searches executives; other
personnel paid below
industry average
Supply Chain Long-term supplier Tends to purchase
relationships competitively to find
bargains
Inventory High finished goods Process focus drives up
inventory to ensure all work-in-process
demands are met inventory; finished goods
inventory tends to be low
Maintenance Highly trained staff; Highly trained staff to
extensive parts inventory meet changing demand
 Strategy development and
implementation

Mission

Internal External
Strengths Opportunities

Analysis

Internal External
Weaknesses Threats
Strategy
 Strategy development process
Environmental Analysis
Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.

Determine Corporate Mission

State the reason for the firm’s existence and identify the
value it wishes to create.

Form a Strategy
Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability,
after-sale service, broad product lines.

From this process the key success factors (KSFs) are identified
 Key success factors and core
competencies
No firm can do everything exceptionally well so successful
strategy requires determining firm’s critical success factors
and core competencies
KSFs – activities or factors that are necessary for a firm to
achieve its goals and competitive advantage
Core competencies – the set of unique skills, talents, and
capabilities that a firm does at a world-class standard
Idea is to build KSFs and core competencies that provide a
competitive advantage and support a successful strategy
and mission
For the course we will look at the 10 OM decisions that
typically include the KSFs (not much focus on KSFs for
finance and marketing)
 Dynamics of strategic change
Strategies are dynamic (change) for 2 reasons:
Changes within the organisation
– Personnel
– Finance
– Technology
– Product life
• Strategy changes in both OM and overall strategy during
different phases of the product life cycle
• E.g. as product moves from introduction to growth, product
and process design typically move from development to
stability
• As product moves to growth stage forecasting and capacity
planning become issues
Changes in the environment
– Strategy changes as the environment changes
4 Global/International
Operations Strategy
Options
 Global operations strategy options
Many operations strategies now require an international
dimension
Firm with international dimension is called international
business or a multinational corporation (MNC)
International business – any firm that engages in
international trade or investment, cross-border transactions
MNC – firm with extensive international business involvement
Op managers of international and MNCs approach global
opportunities with1of 4 operations strategies:
– International
– Multi-domestic
– Global
– Transnational
 Global operations strategy options
High Global Transnational
Strategy Strategy
• Move material, people or
• Standardised product ideas across national borders
• Economies of scale • Economies of scale
• Cross-cultural learning • Cross-cultural learning
Cost Reduction

E.g. Otis Elevator, E.g. Coca-Cola, Nestle

Caterpillar

Multidomestic
International Strategy
Strategy
• Use existing domestic model
• Import/export or license globally, decentralised control
existing product • Franchise, joint ventures,
subsidiaries
E.g. Harley-Davidson E.g. McDonald’s
Hard Rock Cafe
Low
Low High
Local Responsiveness
(Quick Response and/or Differentiation necessary for local market)
 1. International strategy
A strategy in which global markets are penetrated using
exports and licenses
Least advantageous - little local responsiveness and little
cost advantage
Often the easiest as exports require little change in existing
operations
Licensing agreements often leave much of the risk to the
licensee
 2. Multidomestic strategy
A strategy in which operating decisions are decentralised to
each country to enhance local responsiveness
Organisations are typically franchises or joint ventures with
substantial independence
Advantage – maximising competitive response for the local
market
Little or no cost advantage
 3. Global strategy
A strategy in which operating decisions are centralised and
headquarters coordinates the standardisation and learning
between facilities
Appropriate when strategic focus is cost reduction, but not
good to use if the demand for local responsiveness is high
 4. Transnational strategy
A strategy that combines the benefits of global-scale
efficiencies with the benefits of local responsiveness
Transnational – condition in which material, people, and ideas
cross national boundaries
‘world companies’ whose country identity is not as important
as its interdependent network of worldwide operations
Resources and activities are dispersed but specialized
National identities of transnational companies continue to
fade