- What can go wrong if a firm fails to articulate a strategy?
- What four steps are used to formulate strategy?
- What are four competitive advantages that define a firm’s competitive positioning?
- How do order qualifiers differ from order winners?
- Why are "abstract" core competencies more useful than concrete core competencies when creating sustainable strategic advantage?
- To maintain internal strategic consistency, how should a firm that offers a highly standardized product differ from one that offers customized, one-of-a kind products?
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LECTURE NOTES -- CHAPTER 2
OPERATIONS STRATEGY
When U. S. mass production was in its heyday (around the 1950’s and 1960’s), the typical operations manager was seen as something of an efficiency expert – someone with an eye for detail, cost-cutting fanaticism, and a robot-like response to problems. The stereotype was probably somewhat exaggerated, but we now acknowledge that part of the decline experienced by U. S. manufacturers in the 1970’s was due to an inability to "see" how the operations function needed to relate to a changing business environment. Wickham Skinner, a well-known professor from Harvard, began a revolution in the mid-1970’s that resulted in the development of strategic thought for the operations function.
Skinner’s most important contribution was in pointing out that the cost-cutting orientation of operations managers did not mesh well with a changing consumer taste for greater product variety and higher quality in the 1970’s. During the 1950’s and 1960’s, people were astonished at the prosperity they began to enjoy. Many young married couples grew up during the Great Depression and World War II and never expected to own their own homes, get college educations, and enjoy a government "safety net." The era of the 1950’s was criticized for its "cookie-cutter" housing developments and "keep up with the Jones’" consumerism, but the pent-up demand for the good life was so strong that mass production satisfied the needs of most consumers. Unfortunately for operations managers in the 1970’s, they failed to see that the market’s inevitable push for change would disrupt their tidy world of "economies of scale" and "learning curve" productivity (as volumes double, production costs decrease by a fixed percentage).
Think about it – your factory is set up to make one standard product very well, then orders start coming in for little changes here and there. The operations manager struggles to accommodate the special orders. Soon, it seems that special orders have become the norm, and somehow the factory has become a disorganized mess trying to satisfy two distinctly different needs.
Anecdote: Skinner tells the story of an electronic instrument company that made fuel gauges and automatic-pilot instruments in the same plant. After years of failure to make a profit on fuel gauges, the company was ready to sell off that portion of the business. As a last resort, the plant manger decided to build a wall around the fuel-gauge production facilities and manage them separately. As a result, the equipment and the process technology was segregated, and after 4 months, the fuel gauge business became profitable! The explanation for this result is that two incompatible product lines were produced within the same plant and with the same mass production philosophy.
When organizations make choices about the specific emphasis they will place on what products to make, what services to offer, and how to provide them, we call itstrategy formulation. The key to successful strategy formulation is articulating the choice so that a mismatch between the market and operations is not created over time.
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Strategy Formulation
Strategy formulation consists of four basic steps:
- Defining a primary task – represents the primary purpose of the firm, what the firm is in the business of doing.
- Assessing core competencies – identifying what the firm does better than anyone else.
- Determining order winners and order qualifiers
- Order qualifier – a threshold minimum characteristic that is necessary for the customer to even consider purchasing it
- Order winner – the characteristic that makes the customer choose the product over another
- Positioning the firm – choosing one or two important things to concentrate on and do extremely well.
- List the order winners and qualifiers that made you choose to take this course from this college. How do they compare with those for someone who may have chosen Harvard?
In this next section, strategy formulation is developed further, but if you come across any terms that you don’t understand, be sure to have a look in the glossary to clarify your understand.
GLOSSARY
Strategy and Competitive Advantage
The study of strategy has developed some complexity over time. In general, the study of business strategy first identified two basic generic strategies:
• Low-cost strategy– High volume, mature products
– Long production runs, little customization, emphasis on productivity
– Short runs, flexible production, high quality
- Low cost
- Speed
- High quality
- Flexibility
• 1960’s:
- Emphasis on cost alone
- Low competitiveness
- High pent-up demand among WWII adults
• 1970’s:
– Strategic tradeoff approach -- choose low cost, high quality, flexibility, or speed
!
Flexibility <------!-------> Speed
!
High Quality
- Skinner’s work showed the need for concentrating on a single set of tasks for a chosen competitive advantage
- Competitive advantage was defined along the four dimensions: low cost, flexibility, high quality, and speedy delivery
- In general, the assumption here was that there are tradeoffs associated with making choices. For example, choosing to compete on speedy delivery would result in cost increases that blocked the ability to compete on low cost.
- – Do all four simultaneously -- Low cost, high quality, flexibility, and speed
Flexibility
! -- _
Quality ---->! >---->Low Cost
! –
Speed
- Most firms today would argue that it is not enough to do well on only one dimension; firms must do well on all four
- New technologies and work methods allow many firms to perform much better on all four dimensions than in the past (more on this in later chapters).
- But firms may still choose to emphasize one as a competitive advantage; this is somewhat akin to order winners/qualifiers – firms must now meet very high thresholds of performance on three of the dimensions, then excel on the order winning dimension.
- A few firms continue to compete along the old lines by emphasizing a single dimension and disregarding all others (Rolls Royce/Morgan, although even Rolls Royce, which has been acquired, is looking at cutting costs)!
- Some analysts would argue that industrialized nations like the U. S. must abandon the low cost strategic tradeoff approach and leave that method of competition to newly industrializing nations with low labor and regulatory costs.
- Think of the hotel/motel industry. Identify the companies below with a low cost competitive advantage and those with a high quality competitive advantage.
- Motel 6
- Hyatt Regency
- Hilton
- Super 8
- Are any order qualifiers associated with each hotel, and if so, what are they?
- Your book discusses "mass customization." In essence, this is the ability to custom- tailor products to each customer’s unique tastes and provide the finished item at low mass production cost. Look at the items below and choose those which are associated with "mass customization."
- Computerization
- Fixed automation
- Quick changeover from one product to another
- Long wait times
- Can you think of any industry where competitive advantage is not very clear, that is where all competitors seem to be competing well along all four of the dimensions of strategic advantage? Do you think this is a consequence of responding to market signals for change (like when UPS went head-to-head with FEDEX) or of developing multiple product lines to respond to a variety of competitive pressures?
- Shared Problem-Solving
- Importing Knowledge
- Integrating New Technologies and Methodologies
- Experimenting
IN-LINE EXERCISES
- Match the core competencies with the appropriate meaning:
| Importing Knowledge | Trying risky new ideas and encouraging individual initiative |
| Experimentation | Making everyone responsible for solving problems; minimal levels of management and limited technical staff assistance push problem-solving to employee level. |
| Shared Problem-Solving | Using knowledge from the business environment, competitors, and suppliers to improve work performance using knowledge from the business environment, competitors, and suppliers to improve work performance |
| Integrating New Technologies and Methodologies | Constantly looking for ways to improve existing technology and methods, as well as inventing better ways of doing things. |
- Take a visit to http://www.southwest.com/press/factsheet.html, and look at the information there. How does Southwest Airlines use the four core competencies: shared problem-solving, importing knowledge, integrating new technologies and methodologies, and experimenting? Add anything else you might know about Southwest Airlines that is not shown on the website. (Why does SWA use only Boeing 737 jets. Why is SWA headquarters located at Love Field in Dallas?)
Strategy is easier to formulate than it is to implement. For successful implementation, action plans must be clearly indicated. A method of implementation is called policy deployment.
A hierarchy of planning should lead to a cascade of action plans:
- Mission and Vision
- Corporate Strategy
- Functional Strategy (Marketing, Operations, Financial)
- Cascade of Action Plans
- Corporate Strategy Action Plan: We will reduce the product cycle time by 30%
- Marketing Action Plan: We will create strategic alliances with distributors to shorten product release time
- Operations Action Plan: We will reduce our supplier base, certify suppliers, and implement a just-in-time system
- We will reduce our supplier base by 30%
- We will contact our suppliers and notify them that new certification procedures will be implemented in the next year
- We will determine which suppliers are willing to work with our certification requirements
- We will set criteria for eliminating suppliers
- Etc.
Products and Services (Balancing customization against wait time)
- Make-to-order -- providing customized products for each customer; customer may have to wait for order; goal is to give customers what they want while avoiding excessive wait time.
- Make-to-stock – providing more standardized products for customers; customers do not have to wait, but may not get exactly what they want; goal is to accurately forecast customer needs and carry enough stock to service most customers
- Assemble-to-order -- providing some customization by assembling standard modules into customer options; a hybrid of the above two.
Process and Technology (Balancing the degree of product customization against the production volume)
- Project -- production of very unique, capital-intensive jobs and services, like construction; usually done off-site (at a customer’s location, not in a factory) – concerned with balancing schedule, resource cost, and contract performance.
- Batch or job shop production – production of small to medium volumes of customized products
- Mass production -- production of large volumes of standard products.
- Continuous flow production -- production of high volume of single standard product that flows, like oil, beverages, foods.
- Newer production technologies – mass customization, flexible manufacturing systems, agile manufacturing, lean production, computer integrated manufacturing, and computer aided manufacturing; these allow a combination of batch production advantages with mass production advantages, that is, product customization at low cost. They will be discussed further in Chapter 6.
IN-LINE EXERCISE
- Match the products with the following four process types:
| Project | Tricycles |
| Custom or Batch Production | Beer |
| Mass Production | Office Buildings |
| Continuous Flow Production | Leather Saddles |
Human Resources -- Balancing skill requirements against investments in human resources. Decisions about human resources are multi-faceted and require a good match among work methods, technology, skills, and management.
Quality -- Determining the appropriate systems for control and the appropriate emphasis to place on different types of quality.
Sourcing -- Balancing the need for internal control against the risk of ownership. Here, and organization must consider how much of the production should be entrusted to other companies – a classic make-or-buy decision combined with strategic considerations.
- Vertical integration – owning many parts of the production chain (like supermarkets owning fruit orchards and food processing plants). This entails considerable risk because when the demand for the product declines, very large parts of the organization are affected. On the other hand, it offers greater control than outsourcing since the organization has internal access.
- Outsoucing – purchasing products and services outside the firm. This idea works on the basis that companies should do only what they do best for overall economic efficiency. Some internal control is sacrificed for lower costs and less risk.
Operating Systems – executing strategy on a daily basis; FEDEX’s system of centralized sorting is an example of a strategic operating system. This part of strategy formulation might seem quite procedural and structured, yet some of the best operating systems are very innovative and creatively designed.
- Contrast the internal strategic consistencies of Quick Lube service stations with those of a full service auto repair shop. Show whether the type of strategic choice goes with Quick Lube or the full service auto repair shop.
-
Products and Services: Make-to-Stock (or Standard) Product
-
Process and Technology: Batch or Job Shop Process
- Capacity and Facilities: Many small, dispersed, special purpose shops
b. Full Service Shop
- Human Resources: Multi-skilled and highly trained
- Quick Lube
- Full Service Shop
- Quick Lube
- Full Service Shop
- Do you agree with analysts that argue companies using a low cost strategic choice must abandon such production in the U. S. and move it to newly industrializing nations? That is, will items such as low cost toys and clothing be produced in countries with low wages and large numbers of low skill workers (like Nike)? If so, would such a practice be tantamount to exploiting others? Argue your position. (Discussion points: loss of low wage jobs, low skill job displacement in industrialized nations, "fair" trade, "industrial policy," exploitation, fair market values, social responsibility)
- When thinking about outsourcing low cost production to developing nations, we can analyze the issues by comparing some ideas of Adam Smith against those of Lenin, who saw trade as essentially exploitative. See if you can form your own beliefs by answering the following questions: what would the theory of "comparative advantage" say about nations choosing certain "strategies" of competition? What is the foundation of the theory of free trade? How does it differ from the trade theory of imperialism?
Issues and Trends in Operations
Now that we have reviewed some of the reasons for changes that have occurred in operations management, let’s look at the environment that has demanded these changes. Some trends and issues that have driven change include:- Global markets, global sourcing, and global financing
- Virtual Companies
- Product variety and customization; greater choice, more individualism(less mass production of standard products)
- Emphasis on service
- Speed and Flexibility (ability to change products, volumes, and processes rapidly)
- Supply Chains
- C-Commerce. Collaborative commerce
- Advances in technology (both product and process technology)
- Knowledge
- Ethical and environmental concerns
