©The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin Chapter 3 Strategy and Value: Competing Through Operations

3-2 Learning Objectives Describe the concepts of business-to-business (B2B) and business-to-consumer (B2C). Define the concept of a supply chain. Describe the value attributes common to B2B and B2C customers. Describe the role of the strategies that form the strategy hierarchy. Describe the role and importance of supply chain strategy Describe Porter’s three strategies Define order winners, order losers, and order qualifiers and relate them to value. List and describe examples of strategic structural and infrastructural decisions. List and describe the competitive priorities of operations. Summarize the effects each strategic decision category has on operations’ competitive priorities. Distinguish between capabilities and processes. Compare the strengths and weaknesses of process-oriented, product-oriented, and cellular layouts. Describe the continuum of choices related to production volume and the alternatives available for linking to customer demand. Describe what is meant by a capability chain.

3-3 Supply Chains A supply chain encompasses all activities associated with the flow and transformation of goods from the raw material stage (extraction), through the end user, as well as the associated information flows.

3-4 Supply Chains Basic Producer ConvertersFabricatorsAssemblers Support Services Transport Storage Finance, etc. Basic Producer – Mines, extracts or harvests natural resources Converter – Refines natural resources Fabricator – Converts refined materials into usable components Assembler – Assembles components into finished products

3-5 Supply Chains Exhibit 3.1 Generic Supply Chain Model

3-6 Value Attributes of Consumer Customers Cost – What does it cost for the total time of ownership? Quality – Does it meet my needs? Convenience – How easy is it to get? Timeliness – How quickly can I get it? Personalization – Will the business treat me as special? Do they know me? Ethical Issues – Is the business acting responsibly? Style/Fashion – Is the product the most current style? Technology – Do I need technical skills to use this product?

3-7 Value Attributes of Business Customers When determining product or service value, a Business evaluates its potential to add value to the products or services it sells to its customers. Cost – What does it cost for the total time of ownership? Quality – Does it meet our specifications? Delivery Dependability – Does the firm meet delivery promises? Flexibility – Can they adapt to special needs? Response Time – How quickly can they get it to us?

3-8 The Value Transfer Model Those producers sell it to consumers if it matches the value attributes they desire. Suppliers create value. They sell it to product and service producers.

3-9 Operations Management Framework In A Successful Strategy... The firm has made decisions that enable it to continue providing value profitably. Customers perceive value that is greater than the value offered by competitors. A s trategy is a plan for creating value. A strategy is a pattern of decisions an organization adopts in order to link resource decisions to goals. A strategy is not what you say it is-it is defined by what you do.

3-10 The Strategic Hierarchy Mission Statement Corporate Strategy Business Strategy Operations Strategy

3-11 The Strategic Hierarchy Mission Statement –A short statement of what a business does, what its values are, who its market is, and why. Corporate Strategy –Broad and general in large diversified companies –Defines the businesses the corporation will engage in and how resources will be expended in these businesses. –Sets expectations for business performance Business Strategy –The general basis on which the business will compete Cost Leadership Differentiation Focus Functional Strategy – Sets priorities so that day-to-day decisions support business strategy

3-12 A Closer Look at Business Strategies Cost leadership –Keep costs lower than those of competition –May lead to lower prices than competitors Differentiation –Create products or services that are different enough to be more attractive or better match customers view of value Focus –Target a small segment of the market

3-13 Cost Quality Response Time Dependability Convenience Style/ Fashion Ethics Technology Flexibility Personalization Cost Quality Response Time Dependability Flexibility Understand what is “valued” in the market Choose which attributes to emphasize Prioritize those attributes Design operations to support those priorities REMINDER: Operations management is “The management of resources used to create saleable products and services” Business & Operations Strategy X X X X X X

3-14 Functional strategies must support one another as well as the higher level strategies!! Operations Strategy –How to design the operation –How to allocate productive resources Operations Strategy

3-15 Environmental Scanning Enables the business to stay abreast of changes in –Technology –Customer expectations –Competitor’s offerings –Global politics –Regulations –Costs of inputs

3-16 Structural vs. Infrastructural Decisions Structural - Related to tangible resources (buildings, equipment, process, supply-chain integration) Examples –Capacity High vs. Low volume Equipment, Adding capacity, Flexibility of capacity –Facilities Location, size, design, number –Process Technology Layout, Automation –Vertical Integration/Supplier Relationships Supplier links, partnerships, integration vs. outsourcing

3-17 Structural vs. Infrastructural Decisions Infrastructural - Related to systems used to enhance the utilization and control of structural resources Examples –Human Resources Skill level, part vs. full time, salaries –Quality Prevention vs detection, control, specifications, supplier involvement –Planning & Control Inventory management, vendor policies

3-18 Structural vs. Infrastructural Decisions Infrastructural Examples (continued) –New Product Development Sequential vs. parallel activities, development team composition –Performance measurement Team vs. individual incentives, types of measures, types of rewards –Organization structure Organizational structure, line and staff relationships

3-19 Strategic Decision Categories and Value Structural and infrastructural decisions affect value, and ultimately whether or not the customer’s needs are met. REMINDER: Operations management is “The management of resources used to create saleable products and services.” The structural and infrastructural decisions dictate how those resources are used.

3-20 Operations Strategy Align the value being created (cost, quality, response time, dependability, convenience, etc.) with resource decisions (inventory, workforce, capacity, facilities) so that your investment in resources creates what customers expect and you get a financial return on that resource investment that is better than your alternatives.

3-21 Value Attributes and Competitive Priorities The value attributes customers want... must dictate how operations makes resource decisions

3-22 Summary of Competitive Effects of Structural Decisions Insert Exhibit 3.10

3-23 Summary of Competitive Effects of Infrastructural Decisions Insert Exhibit 3.11

3-24 Strategic Objectives, Capabilities, and Process Requirements Mary’s Speedy Pizza –Guaranteed Pizza Delivery in 20 minutes

3-25 Order Qualifiers and Order Winners Mary looks at “Speedy” delivery as an order winner –She organizes processes to create capabilities that support the strategic objective Other minimum expectations must also be met before customers consider alternatives. –Taste & Temperature –Must develop process supported capabilities in these areas as well.

3-26 Order Losers, Order Qualifiers, Order Winners Order Qualifier: hamburgers and fries are available. Order Winner: a cool toy is given with the meal. Order Loser: bad tasting food, soggy fries, etc. Example: Taking a group of children to lunch Example: Selecting a bank after moving to a new city Order Qualifiers: ATM access, online banking drive-up window Order Winner: free checking, no ATM fees for other banks’ ATMS Order Loser: No ATM access, no online access.

3-27 Customers pay for capabilities, not processes or resources HOWEVER... –No capability delivers a competitive advantage (i.e., acts as an “order winner”) forever. –No capability delivers competitive advantage alone. –Because capabilities rely on processes, competitive advantage can be obtained by concurrent design of capabilities along with products and processes.