Chapter 2 Operations Strategy and Performance Management

Strategy and Strategic Planning

Corporate Strategy A set of objectives, plans, and policies for the organization to successfully compete in its markets.  Long range (3 to 5 years)  It specifies what organization’s competitive advantage will be  Focuses on few key areas

Corporate Strategy Outline of Corporate Strategy  Specifies business(es) of the company (new products/services)  Identifies opportunities & threats of the environment (environmental responses)  Determines growth objectives (goals)  Differentiates from others (core competencies)  Global strategies (Strategic alliance, Locating abroad)

A well formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents

Organizational resources: assets capabilities functional strengths technology product development process & market expertise Posture: competitive priorities

Considerations… Responding to flexibility competition, manpower, volume, technology, etc. Adjusting to business environment through environmental assessment Identifying Core Competencies unique resources and strengths

Strategy Formulation

Mission and Vision Statements Mission statements express organization’s purpose or reason for existence. Includes: Products, technologies, market, customers, competencies Vision statements used to express organization’s values and aspirations - Solectron: “Be the best and continuously improve”.

Core Competencies Collective knowledge and skills an organization has that distinguish it from the competition. Typically center on an organization’s ability to integrate a variety of specific technologies and skills in the development of new products and services. Building blocks of core capabilities.

Core Competencies continued Are basis on which new outputs are developed. Better to think of organization in terms of its portfolio of core competencies than as a portfolio of products. Identifying and developing core competencies is one of top management’s most important roles.

Core Capabilities Organization practices and business processes Transferring out core processes could result in Hollowed Out and Creeping Breakeven Phenomenon effects

Core Competencies Used to Gain Access to Variety of Markets Cannon –core competencies in optics, imaging, and electronic controls –Products include copiers, laser printers, cameras, and image scanners. Boeing –integrating large scale systems –commercial jetliners, space stations, missiles

Key Characteristics of Core Competencies/Capabilities Should be used to gain access to a variety of markets Should be strongly related to key benefits provides by products or services Should be difficult to imitate

Repercussions of Extensive Outsourcing Activities Hollowed Out Phenomenon Creeping Break-even Phenomenon

Hollowed Out The extent that most of a firm’s complex parts and production are outsourced Often when complex parts outsourced, engineering talent follows Supplier may become competitor

Creeping Breakeven Phenomenon Viscous cycle where products appear to become more expensive to produce in- house as others are outsourced. –Result from ways overhead is allocated Logical conclusion is organization ends up producing no outputs.

Market Analysis Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment

Market Analysis  To understand what customers want and provide it better than the competitors do.  How? – Market segmentation – Needs assessment for each segment

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment Competitive priorities OperationsMarketing cost qualityFinance time flexibilityOthers

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies These priorities can be grouped into 4 categories: Cost1.Low-cost operations Quality2.High-performance design 3.Consistent quality Time4.Fast delivery 5.On-time delivery 6.Development speed Flexibility7.Customization 8.Volume flexibility

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment Competitive priorities OperationsMarketing cost qualityFinance time flexibilityOthers

Functional Area Strategies Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment Competitive priorities OperationsMarketing cost qualityFinance time flexibilityOthers Functional area strategies finance marketing operations others The means to implement Corporate Strategy Links ST and LT Operations decisions Cross-functional coordination

Capabilities Capabilities current needed plans Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment Competitive priorities OperationsMarketing cost qualityFinance time flexibilityOthers Functional area strategies finance marketing operations others

Strategy and Decisions Operations strategy Market analysis Competitive priorities Corporate strategy ServicesManufacturing Standardized services Assemble-to-order Customized services Make-to-stock Assemble-to-order Make-to-order

Operations StrategyCompetitive priorities Standardized ServiceConsistent quality On time delivery Low cost Assemble-to-orderCustomization Fast Delivery Customized servicesHigh performance Design Customization

Strategy and Decisions Operations strategy Market analysis Competitive priorities Corporate strategy ServicesManufacturing Standardized services Assemble-to-order Customized services Make-to-stock Assemble-to-order Make-to-order

Operations StrategyCompetitive priorities Make to StockStandardized Product Accurate Forecast Consistent quality On time delivery Low cost Assemble-to-orderCustomization Fast Delivery Make-to-OrderHigh performance Design Customization

Strategy and Decisions Operations strategy Market analysis Competitive priorities Corporate strategy ServicesManufacturing Standardized services Assemble-to-order Customized services Make-to-stock Assemble-to-order Make-to-order Process decisions Quality decisions Capacity, location, and layout decisions Operating decisions

Strategy and Decisions Operations strategy Process decisions Quality decisions Capacity, location, and layout decisions Operating decisions Market analysis Competitive priorities Corporate strategy ServicesManufacturing Standardized services Assemble-to-order Customized services Make-to-stock Assemble-to-order Make-to-order Capabilities

Three Perspectives on Operations Strategy

Operations Strategy as: Rational Product-Process Matrix Organizational Strategy development & strategy deployment (“honshin kanri”) Political

Operations-Based Strategy  Strategy too often a high-level chess game  Operations is foundation for strategy – Attack larger, entrenched competitors – Buttress (support) existing competitive advantage – Inherently difficult to imitate  Examples – Australian Paper Manufacturers – Crown Equipment – Southwest Airlines, Wal-Mart – American Connector Company (counterattack) Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Attacking through Operations  Appeal to different customer needs – Differentiate from current players Price, quality, flexibility, speed, innovation – Build consistent operations infrastructure Integrated values, skills, technologies, relationships, … Difficult for competition to duplicate  Build experience and capabilities – Get down the learning curve – Means of building capabilities Process, systems, and/or organization-based Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Defending through Operations  How to defend against ops-based attacks? 1.Exploit own internal strengths Reemphasize existing capabilities 2.Attack attacker’s ops-based weaknesses Focus on what attacker cannot do 3.Emulate attacker’s strategy, but faster Acknowledge threat and respond rapidly Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Ops Strategy Sustains Advantage  Operations-based strategies are robust  Difficult to replicate, slow to diffuse – Require substantial organizational change and realignment – Impact management philosophy and corporate culture  Dynamic and unpredictable – Continuous improvement, ongoing invention – Learn and adapt quickly Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Operations-Based Lessons  Ops capabilities cannot be bought of shelf – Ops capabilities take a long time to develop  Develop rapid organizational learning – Ops capabilities often recognized after the fact  Quickly recognize latent threats – Don’t ignore small or foreign competitors  Don’t strive for “best practice,” search for “new practice” – Push the envelope of the efficient frontier!  Focus! Do fewer things, but do them better… Hayes and Upton, “Operations-Based Strategy,” California Mgmt. Review, Summer 1998.

Measuring Operations Performance

Balanced Scorecard Cost and Productivity Quality Time Availability and Flexibility Common Metrics