Operations Strategy

Theres nothing here to take by storm; to strategy we

must conform.
Johann Wolfgang von Goethe (Faust,1808)

Competitive Strategy

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

Competitive Strategy: Environmental Scanning

(Opportunities and Threats)

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

Competitive Strategy: Competing Edges of the

System (Strengths and Weaknesses)

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

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
timelyArdavan
yet Asef-Vaziri
limited Jan-1011
variety at
Operations
Strategy:
1- Introduction
5

Competitive Strategy is Followed by Financial,

Marketing, and Operations Strategy
Competitive
Financial Strategy
strategy:

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

Organizational Resources

Organization is a bundle of real recourses.

Real Resources

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

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

Operations Strategy: Process View

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 inter-functional
relationships as well as the external interfaces with customers
and suppliers.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

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:

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

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

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 organizations 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

Competencies determine the set of outputs that the

operation will be particularly good at providing.

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

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

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

When outsource Coordination,

How match
& how manage product, process
demand to
suppliers?
transportation available supply

Ardavan Asef-Vaziri

Jan-1011

Innovation
How and when
to improve and
innovate?

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Competitive Product Space

Competitive Product Space: A representation of the
firms product portfolio in the four dimensional space:
Q, C, Var., Res.
Variety

Another firm: expensive and

customized products.

One firm: low cost and

standardized products

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

A
High

Low

Price
Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

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Operational Effectiveness

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?

Cost Efficiency: achieving an output with minimal level

of input and resources
Effective Process: supports execution of companys
strategy

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

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Focused Strategy, Focused Operations

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)

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

High

Low

Price
Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

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Efficient Frontier

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

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
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

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

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 resourcedriven organization.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Jan-1011

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