MGT 3501 - Operations Management Fall 2005

Operations Strategy
What is Operations Strategy ?
Operations Strategy is concerned with setting
broad policies and plans for using firm resources
to best support long-term competitive strategy.
Operations strategy needs to support overall
corporate strategy.
Competitive Dimensions
1. Cost
Make it cheap
2. Quality (product & process) Make it good
3. Delivery Speed
Make it fast
4. Delivery Reliability
Deliver as promised
5. Demand Management
Handle Changes in Demand
6. Variety
Make more than one type
7. Innovation
First mover advantage
Competitive Dimensions
All of the competitive dimensions are important…
why not try to excel along every one?
Competitive Dimensions and Trade-offs
Trade-offs: Decisions that arise because of the
inability of processes to excel simultaneously
across all competitive dimensions.
Which Dimensions Should Be the Focus?
Order winners: Criterion that differentiates one firm
from another.
Examples: Cost (Southwest Airlines), service quality
(Ritz-Carlton Hotels), Flexibility (Dell)
Order qualifier: Criterion that permits the firm’s products
to even be considered for purchase.
Example: basic quality necessary to be considered a
good car (consumer reports).
Southwest Airlines overall corporate strategy is to
“serve price- and convenience-sensitive customers.”
Corporate Strategy
Developing an Operations Strategy
1. Segment the market according to the product group.
Example: High-end vs. low-end consumers
2. Identify (a) product requirements, (b) demand patterns, (c)
profit margins. Example: many components, seasonal,
low demand, high profit margin.
3. Determine the order winners and order qualifiers.
Example: delivery speed (winner), cost (qualifier)
4. Convert order winners into specific performance
requirements. Example: Must sell at or below $600
Developing an Operations Strategy
The next step is to analyze the process level…
1. Define the complexity and volume of your
2. Define whether you offer few specific products/services
or highly customized products/services.
3. Determine product design, process design, supply chain
design, supplier relations, capacity management plan &
technology choice
• Southwest Operations – low cost
– Point-to-point between midsize cities & secondary
airports in large cities
– 15-min gate turnaround
– No meals
– No assigned seats
– No interline baggage checking
– No premium classes of service
– Automated gate ticketing
– Standardized fleet of aircraft
Measuring whether the strategy is working
Productivity is a common measure for how
well a company is utilizing its resources
Productivity 
• Productivity measurement shows how well the
company performs for a given level of inputs.
• Partial measures may give more specific details
about performance.
Productivity Measurement
Example: Consider the following case. A bank has net
output (income) of $500,000. The bank employs 40,000
The partial labor productivity is 500,000 / 40,000 = 12.5
What does this tell you?
Productivity Measurement
The productivity index is a relative measure.
It has to be compared with something else:
1. Benchmarking.
2. Changes over time.
The important thing is to be consistent in measurement!
• Walmart – low cost
– High investment into IT to manage inventory,
analyze point of sales data, track shipments, etc.
– Management by data
– Scale
– Negotiation power with suppliers
Summary and Conclusions
1. Firms must trade-off competitive dimensions when
defining operations strategy.
2. This can be done by defining order winners and
order qualifiers.
3. A Productivity Index can measure the relative
performance between firms (or products, SBU’s, etc)