Chapter 2 - Operations
Strategy and Competitiveness
Operations Management
by
R. Dan Reid & Nada R. Sanders
3rd Edition © Wiley 2007
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Learning Objectives
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Define the role of Business Strategy
Explain how a Business strategy is developed
Explain the role of Operations Strategy
Explain the relationship between Business and Operations
strategy
Describe how an Operations strategy is developed
Identify competitive priorities for Operations function
Explain the strategic role of technology
Define and compute productivity measures
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The Role of Business Strategy
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Provides a plan (business strategy) making
the best use of resources that:
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Defines the long-range plan to compete in the
marketplace
Helps to differentiate the firm from competitors
Provides a game plan upon which functional
strategies are developed
Focuses on doing the “right tasks”
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Business/Functional Strategy
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Corporate Strategy
Focus: Survival
Business Strategy
Focus: Distinctive Competence
Cost Leadership
Product Differentiation
Focus (cost or differentiation)
Operations Strategy
Focus: Competitive Priorities
Cost Flexibility Quality Delivery
Capability Building
Implementation
Resources
Process
Structure
Product
Infrastructure
Other Functional
Strategies
Marketing
Finance
Human Resources
Engineering
Information Systems
Policy
Service-enhanced
Product or
Delivered Service
Satisfied Customer
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Three Inputs to a Business Strategy
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Operations Strategy – Designing
the Operations Function
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Competitive Priorities- The Edge
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Four Important Operations Questions: Will
you compete on –
Cost?
Quality?
Time?
Flexibility?
All of the above? Some? Tradeoffs?
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Competing on Cost?
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Offering products/services at a low price relative to
competitors.
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Typically high volume products
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Often limit product range & offer little customization
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May invest in automation to reduce unit costs
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Can use lower skill labor
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Probably use product focused layouts
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Low cost should not mean low quality
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Competing on Quality?
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Quality is sometimes subjective
Quality may be defined differently by customers
versus employees
Quality dimensions:
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High performance design:
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Product & service consistency:
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Superior features, high durability, & excellent customer service
Meets design specifications
Close tolerances
Error free delivery
Quality issues to address:
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Product design quality – products/services must meet
requirements
Process quality will produce error-free products/services
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Competing on Time?
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Time is one of the most important competitive priorities
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Being first-to-deliver often wins the race
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Time –related issues:
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Fast delivery:
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On-time delivery:
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Focused on shorter time between order placement and delivery
Deliver product exactly when needed every time
Rapid development speed
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Using concurrent processes to shorten product development
time
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Competing on Flexibility?
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The company’s environment often changes rapidly
Flexibility is needed to accommodate these
changes
 Product flexibility:
 Easily switch production from one item to another
 Easily customize product/service to meet specific
requirements of a customer
 Volume flexibility:
 Ability to ramp production up and down to match
market demands
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Are There Priority Tradeoffs?
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Emphasize priorities that support the business strategy, which may
require “trade-offs”
Focus on “order qualifiers” and “order winners”
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Which priorities are “Order Qualifiers”?
e.g. Must have excellent quality since everyone expects it
Which priorities are “Order Winners”?
e.g. Dell competes on all four priorities
Southwest Airlines competes on cost
McDonald’s competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility
Can you have both high quality and low cost?
e.g. Yes, Coke and Pepsi are good examples
Can you offer design flexibility and short delivery?
e.g. Yes, modular housing manufacturers do it
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Translating to Production Requirements
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Specific Operation requirements include
two general categories
 Structure – decisions related to the production
process, such as characteristics of facilities
used, selection of appropriate technology, and
the flow of goods and services
 Infrastructure – decisions related to planning
and control systems of operations
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Strategic Role of Technology
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Technology should support competitive priorities
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Three Applications: New product technology, process
technology, and information technology
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Products - Teflon, CD’s, fiber optic cable
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Processes – flexible automation, CAD
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Information Technology – POS, EDI, ERP, B2B
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Technology for Competitive
Advantage
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Technology has positive and negative potentials
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Positive
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Negative
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Costly
Risks such as overstating benefits
Technology should
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Improve processes
Maintain up-to-date standards
Obtain competitive advantage
Support competitive priorities
Can require change to strategic plans
Can require change to operations strategy
Technology is an important strategic decision
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Productivity: Definition
Productivity is the relationship between
the Outputs generated from a system and
the Inputs that are used to create those
outputs. Mathematically
P 
O
I
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Productivity Improvement
Productivity Improvement (PI) is the result of
managing and intervening in key
transformation or work processes.
PI will occur if:
O O O O O
I I I I I
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Measuring Productivity
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Productivity is a measure of how efficiently inputs are
converted to outputs
Productivity = output/input
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Total Productivity Measure
Total Productivity = $sales/inputs $
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Partial Productivity Measure
Partial Productivity = cars/employee
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Multifactor Productivity Measure
Multi-factor Productivity = sales/total $costs
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Measuring Productivity
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Static Measures: P=O/I in a given period of time
(t). Useful for cross-sectional (benchmarking?)
purposes.
Dynamic measures:
t(1)=O(1)/I(1); t(2)=O(2)/I(2);
then t(2)/t(1) yields a dimensionless index that
reflects change in productivity between periods
and ((t(2)-t(1))/t(1))*100 yields the percentage
change between periods.
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Measuring Productivity (cont..)
Partial-Factor: Uses a single “I” factor;
e.g., output/labor-hour, sales/employee.
 Multi-Factor: Uses more than one “I”
factor; e.g. output/direct costs (labor,
materials, and overhead).
 Total-Factor: Uses all “I” factors.
(Note: Total-Factor captures “trade-offs”
between input factors.).
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Interpreting Productivity Measures
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Raw productivity calculations do not tell the complete story unless there
are no major structure differences.
In the prior automobile business example, it is obvious that some major
changes were taking place to yield 15.8% and 13.7% year-to-year
cars/employee productivity improvements. What changes could improve
car sales per employee? Automation? Out sourcing? Major re-design?
Is this partial productivity measurement enough to make an investment
decision?
Is the Total Cost Productivity measure a better reflection of year to year
productivity at 4.2% and 1.6%. Why?
Should you also look at productivity measures for the two major
competitors for comparison?
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Productivity Growth Rate
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Can be used to compare a process’
productivity at a given time (P2) to the
same process’ productivity at an earlier
time (P1)
P2  P1
Growth Rate 
P1
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Productivity Growth Rate
Example:
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Last week a company produced 150 units using 200 hours of labor
This week, the same company produced 180 units using 250 hours
of labor
150 units
P1 
 0.75 units / hour
200 hours
180 units
P2 
 0.72 units / hour
250 hours
P2  P1
0.72  0.75
Growth Rate 
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 0.04
P1
0.75
or a negative 4% growth rate
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EFFECTIVENESS
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Measures what the system sets out to
accomplish (objective) with what was
actually accomplished; budget vs. actual
Hence, effectiveness is an output measure.
(Did the system output the “right” things-right quality, right quantity, on time, etc.)
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EFFICIENCY
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Measures the resources expected to be
consumed to the resources actually
consumed.
Hence, it focuses on the input side of the
system. (To what degree did the system
utilize the “right” things.)
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Productivity, Competitiveness, and
the Service Sector
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A nation’s Productivity effects
its standard of living
Productivity is a measure of
how effectively resources are
used
US productivity growth
averaged 2.8% from
1948-1973
Productivity growth slowed for
the next 25 years to 1.1%
Productivity growth in service
industries has been less than
in manufacturing
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Competing on Productivity
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At the national level, growing productivity
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leads to a higher standard of living
holds inflation in check
enhances international competitiveness.
The annual growth in GDP is due to
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growth in productivity
growth in inflation
(Macroeconomic Theory)
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Productivity Portfolios
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Investments in facilities and equipment
Investments in programs and systems
Investments in people.
(Note: these alternatives are not mutually
exclusive; however, most organizations tend
to choose one as their dominant
orientation.)
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Chapter 2 Highlights
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Business Strategy is a long
range plan. Functions develop
supporting plans
Strategy must address
mission, environment, and
core competencies
Business strategy provides a
guide for designing operations
strategy
Operations strategy must
consider which competitive
priorities are essential to meet
business objectives
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Competitive priorities are cost,
quality, time, and flexibility
Companies must consider which
product, process, and
information technologies to use
Productivity measures how
effectively a firm is using
resources
Productivity is computed as a
ratio of outputs divided by
inputs
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Chapter 2 Homework Hints
6. Output (minus defects); use per day data;
determine P1 and P2, then % change.
7. Output (minus defects); use per month
data.
a. Determine P1 and P2.
b. Determine % change
8. a. Cost to patient=>revenue (output).
b. Output = # patients; input = time
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