Operations Strategy
There’s nothing here to take by storm; to strategy we
must conform.
Johann Wolfgang von Goethe (Faust,1808)
Competitive Strategy
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Principle 1 (Value Maximization) The goal of strategy
is to maximize the long run NPV of the organization.
It is not a pure NPV defined for shareholders, it also
takes into account stake holders (social
responsibilities), as well as environmental impact
(sustainability).
Competitive strategy (Business Unit Strategy).
Relates a company to its environment. Strengths and
weakness of the company (the system) to be related
to opportunities and threats in the environment
Chooses an attractive competitive position  by
offering a high customer value proposition.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Competitive Strategy: Environmental Scanning
(Opportunities and Threats)
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Competitor activities
Complementor activities
Changes in consumer needs and preferences
Technological changes
Economic trends (GNP, unemployment, inflation,
interests, taxes, tariffs)
Legal, political, and environmental issues
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Competitive Strategy: Competing Edges of the
System (Strengths and Weaknesses)
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Human Resources (cheap labor, skilled labor, etc.)
Technology, Facilities, and Equipment
Financial Resources
Customers
Product and Services
Suppliers (low material cost, reliable suppliers)
Management Practices (low overhead)
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Customer Value Proposition
Customer Value Proposition: a set of benefits that the firm
offers to customers.
 Order Qualifiers: Characteristics that convince customers
to consider our product. Order Winners: Characteristics
that convince customers to buy our product.
 Customers purchase based on the value they derive from a
product/service. This value is the greatest amount a
customer is willing to pay (the reservation price).
 If this value > price, the customer enjoys positive net
value (consumer surplus). Customers will buy the
service/product that offers highest consumer surplus.
 Zara's main business is the design, manufacture,
distribution and retailing of clothing. Differentiates itself
from rivals  timely fashion for the masses. The customer
value proposition  timely yet limited variety at modest
Operations
1- Introduction
Ardavan Asef-Vaziri Jan-1011
costStrategy:
and quality.
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Competitive Strategy is Followed by Financial,
Marketing, and Operations Strategy
Competitive
Strategy
Financial
strategy:
Source of
financial
resources and
use of funds
(how
invested).
Operations Strategy: 1- Introduction
Marketing
and sales
strategy:
how the
market will be
segmented and
how the
product will be
positioned and
promoted
Ardavan Asef-Vaziri
Operations
Strategy:
Enabling the
execution of
the competitive
strategy- how
to best deliver
the CVP. What
Resources,
what
Processes,
and what
Competencies
.
Jan-1011
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Organizational Resources
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Organization is a bundle of real recourses.
Real Resources
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Tangible real resources: human resources (people) and
capital resources (property, plant and equipment).
Intangible resources: relationships with suppliers or
customers, reputation and brands, technology and know
how.
To pay for the real resources, sell pieces of paper;
financial resources; securities.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Operations Strategy: Resource View
1. How many resources should we invest in? The capacity, in
aggregate and per main resources.
2. When should we increase/reduce resources over time? The
availability of capacity and the timing of capacity
3. What kinds of resources? HR or CR? The trade-off between capital
and human (unsupervised operations). What degree of flexibility?
from single-task (hard- targeted towards producing a specific
product) to multi-task (flexible- to produce a continuum of
products)?
4. Where should the plants be located and what is their roles in the
supply chain – each location is responsible for what parts or
products. What is the topology connecting these nodes of supply
chain? - FedEx: hub-and-spoke, Car companies: tiered or tree.
What are the modes of transportation in the network? T? R? A? W?
Are the processes standardized or localized; e.g., should Mercedes
Benz processes in be similar to the German processes?
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Operations Strategy: Process View
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The process view  how resources perform activities and add
value. By starting with inputs (customer demands) and
ending with outputs (served customer demands), the process
view is compatible with a customer-centric view of the world.
From this customer-centric view, value stream mapping
defines value from the perspective of the customer: a valueadded activity is an activity that benefits the customer.
The process view: a horizontal view of the organization that
cuts through functional silos ( finance, accounting,
production, marketing sales, etc). It represents interfunctional relationships as well as the external interfaces with
customers and suppliers.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Operations Strategy: Process View
1. Sourcing decisions: make or outsource?, supply
network (how many suppliers and how to manage
them?), vertical integration.
2. Which technologies ? Four types of technology:
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Product technology: Is the product designed in modules
or as an integral system? Does the design take into
account manufacturability and reusability?
Process technology: The transformation process and
methods. The physical layout (job shop vs. flow shop)
and material (unit load) flow pattern.
Coordination and IT: Centralized vs. distributed planning
and control? planning systems (e.g., ERP),
communication technology (e.g., Internet, RF).
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Operations Strategy: Process View
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Transportation technology: material handling in the
plant and transportation network throughout the supply
chain. Also includes how insurance policies are moved
between the different processing steps.
3. How do we match demand and supply? Demand
planning and forecasting, tactical capacity allocation
and revenue management; airlines and hotels.
4. How and when do we improve and innovate in
products and processes? R&D, continuous
improvement, learning and knowledge management.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Values
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Values are a third factor that affect what an operation
(or an organization) can and cannot do.
Values are the standards by which employees set
priorities at every level. Some priorities are
programmed into a process but many are not. Ex.
whether an order or customer is attractive, whether
a suggestion to improve a product or process is
attractive, whether an investment is worth making.
As organizations become more complex, consistent
values are powerful mechanisms for employees to
make independent but consistent decisions.
Values constitute the organization’s culture
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Operations Strategy: Competency View
The competency view characterizes the abilities of the
organization's resources, processes, and values. Competencies
determine the set of outputs that the operation will be
particularly good at providing.
1.Cost, including input costs and resource costs. Is important in low
margin markets.
2. Flow time. Responsiveness (short flow time) is important due to
changes in customer preferences and technologies. Both Flow
time and reliability in flow time (standard deviation).
3. Quality. Quality refers to the degree of excellence of the product
and process. It has product dimensions such as performance and
features and process dimensions such as durability and
reliability (retaining high quality over time). Is a key
differentiator in luxury and high precision businesses.
4. Flexibility. Ability to change type and volume of the operations.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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The Competency View of Operations
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Competencies determine the set of outputs that the
operation will be particularly good at providing.
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A premier management consulting company is good at
providing high quality customized advice.
An efficient operation such as McDonald's is good at
delivering inexpensive food quickly, but from a standard
and limited menu with a well-defined quality level.
Zara is good at quickly delivering a large selection of
new designs at a reasonable cost.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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The Competency View of Operations
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Foundations of competencies change over time; they start in
resources, gradually migrate to processes, and eventually
reside in values.
Most of what gets done in start-up companies is attributable
to inputs and resources. Losing a person can be detrimental.
As activities become more recurrent, processes are defined.
Alcoa started with low price of electricity, then developed
Aluminum smelter processes and exported the processes.
As it becomes clear which business needs should be given
highest priority, values emerge. With hundreds of new
recruits and departures per year, top management consulting
companies remain successful because their processes and
values are so strong that project staffing changes have little
impact.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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A Framework For Operations Strategy
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Operations strategy could emerge from a giant
optimization model identifying the resources,
processes, and competencies to maximize NPV. Not
possible.
Principle 2 (Alignment) Operations strategy is a plan
for developing resources and configuring processes
such that the resulting competencies to align with
competitive strategy –customer value proposition - to
maximize NPV
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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A Framework For Operations Strategy
1. Organization  Customer value proposition for each
market segment?
2. Operations  Prioritize competencies for each market
segment?
3. Which resources and processes best provide that
competency prioritization? For each targeted
customer segment, how the resources (sizing, timing,
type, and location) and processes (supply,
technology, demand, and innovation management)
are configured?
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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A Framework for Operations Strategy
Max NPV
Competitive
Strategy
Competencies
Resources
Operations Strategy
Processes
(Asset Portfolio)
(Activity Network)
Sizing
Timing
Type
Location
How much
capacity to
invest in?
When increase
or reduce
resources?
What kinds of
resources are
best?
Where should
resources be
located?
Operations Strategy: 1- Introduction
Supply
Technology
Demand
Innovation
When outsource Coordination,
How match
How and when
& how manage product, process
demand to
to improve and
suppliers?
transportation available supply
innovate?
Ardavan Asef-Vaziri
Jan-1011
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Competitive Product Space
Competitive Product Space: A representation of the
firm’s product portfolio in the four dimensional space:
Q, C, Var., Res.
Variety
Another firm: expensive and
customized products.
B
One firm: low cost and
standardized products
A
Cost Efficiency (1/cost)
Responsiveness
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Strategic Positioning
Defines those positions that the firm wants to occupy in
its competitive product space. The current position,
direction, and goal position.
Responsiveness
B
A
High
Low
Price
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Operational Effectiveness
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What distinguishes an effective business process?
Operational effectiveness: developing operations
strategy (resources, processes, values, competencies)
that support the strategic positioning (customer value
proposition) better than the competitors.
How does effective differ from efficient?
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Cost Efficiency: achieving an output with minimal level
of input and resources
Effective Process: supports execution of company’s
strategy
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Focused Strategy, Focused Operations
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Focused Strategy: Committing to a limited,
congruent set of objectives in terms of demand
(product, market) and supply (input, technologies,
and volumes).
Aravind Eye Hospital, 100 cataract surgeries a day,
operational excellence, 40% gross margin, 70% of
patients pay almost nothing, and the hospital does
not depend on donations.
A focus process is not limited to a few products.
Focused process: one whose products all fall within
a small region of the 4 dimensional product space.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Plant Within Plants (PWP)
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PWP: The business strategy is diverse. But the
entire business is divided into several mini-plants
each with focused processes. One PWP may focus on
low cost, the other on quick response.
To sustain competitive advantage, a firm must
ensure that its competitors are not able to imitate
its chosen position. An sculpture not a block.
Supporting the strategic position with multiple
mutually reinforcing activities creates a sustainable
competitive advantage. It is harder for competitors
to imitate an array of interlocked activities.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Shouldice Hospital, Corolla, Ferrari
Corolla: flow shop, decentralized assembly plants
close to market, short flow time, low cost
Ferrari: job shop, only a single plant in Italy, longer
flow time, high cost
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Focus and the Efficient Frontier in Health-care
sector
Responsiveness
World-class
Emergency Room
One general
Efficient operations
frontier
facility
World-class
(non-emergency)
Hospital
Cost efficiency
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Strategic Positioning and Operational
Effectiveness
Firms located on the same ray share
strategic priorities.
World class firms are on the efficient
frontier.
Responsiveness
A
B
efficient
frontier
the minimal curve
containing all current
positions in an industry
C
High
Low
Price
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Efficient Frontier
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Firms not on the EF, are not on strict trade-off, they
can make simultaneous improvement on more than
one dimension.
Firms on EF need to trade-off
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Trade-off: decreasing on one dimension to increase on
the other dimension.
World class firms also try to push the EF outward.
As technology and management practices advances, the
EF moves upward. But the impact is not the same in all
industries. Internet impact
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In book industry pushes EF along both the dimensions of
cost and variety
In grocery increases the quality of service to customers,
but increases the cost and reduces the responsiveness and
variety
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Strategic Positioning and Operational
Effectiveness
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Strategic positioning defines the direction of the
improvement from current position, and thus the
position on the EF the company wants to occupy.
Operational effectiveness measures the distance of
the current position to the operations frontier along
the direction of improvement. To bring a company
closer to a frontier or to push the frontier. (direction
is not horizontal)
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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Wal-Mart
Operations
Strategy
– Short flow times
– Low inventory
Operations Structure
– Cross docking
– EDI
– Fast transportation
system
– Focused locations
– Communication between
retail stores
Operations Strategy: 1- Introduction
Inventory at retail stores
Wal-Mart: twice a week
Industry: once every two
weeks.
Sales per square foot
Wal-Mart: $102 in 1985 to
$140 in 1991
Industry: $112 in 1985 to
$110 in 1991
Ardavan Asef-Vaziri
Jan-1011
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Market Driven, Technology Driven Strategies
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This "top-down and outside-in" ensures that
operations reflect the intended market position.
Market driven strategy creates a customer-driven
organization.
In “a bottom-up and inside-out”, the building blocks
of strategy are not products and markets, but
processes and resources. The value proposition
offered to customers seeds in the operational
capabilities. The technology driven strategy creates a
resource-driven organization.
Operations Strategy: 1- Introduction
Ardavan Asef-Vaziri
Jan-1011
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