Chapter 2 Operations Performance Definition Contents The

Chapter 2 Operations Performance

Definition? Contents The Reality Check Operations Strategy Vs Operations Management Strategic Fit Categories of Business Strategies Strategy Formulation Primary Task, Core Competencies, Order winners/qualifiers, competitive priorities, Process strategy matrix, policy deployment

Operations Strategy: Definition

Operations Strategy ‘… the decisions which shape the long-term capabilities of the company’s operations and their contribution to overall strategy through the on-going reconciliation of market requirements and operations resources …’

The Reality Check: Why Strategic Perspective in Operations

Today’s market demands… Being RIGHT Speed Being FAST Dependability Flexibility Cost Being ON TIME Being ABLE TO CHANGE Being PRODUCTIVE Competitiveness Quality

Relative importance of the Operations Resource perspective Performance objective B The relative importance of the market requirements and operations resource perspectives change over time, how performance objectives trade-offs between each other and operations focus can lead to exceptional performance ? TRADE-OFFS Performance objective A Relative importance of the Market Requirements perspective

You are commanding Army 1, the objective is to capture the island. Army 2 has the same objective Army 1 Island Army 2

Burn Island Army 1 Army 2

Do not Burn Island Army 1 Army 2

Broad strategic objectives for a parcel delivery operation applied to stakeholder groups Society Increase employment Enhance community well-being Produce sustainable products Ensure clean environment Suppliers Continue business Develop supplier capability Provide transparent information Shareholders Economic value from investment Ethical value from investment Customers Appropriate product or service specification Consistent quality Fast delivery Dependable delivery Acceptable price Employees Continuous employment Fair pay Good working conditions Personal development

International Markets and Producers Three Major Trading Regions Previously firms classified as domestic, exporters, or international Now have global firms, joint ventures, foreign subsidiaries

Strategy and Issues During a Product’s Life

Ginger Hotels No-frills June 2004 No room service, travel desk, swimming pool Wi-fi Two type of room: Rs. 999 and Rs. 1199 Prabhat Pani, CEO, Roots. Corporation

Bill. Desk, a property of India. Ideas. com Ltd. , 2000 Three Arthur Anderson Executives Third-party bill collection 25 Banks, 100 companies

Difference between Op Strategy and Op Management

Hospital Milestone Presentation of symptoms Awareness of need Visit to doctor for advice and tests Enquiry time Test information confirms diagnosis Software producer Customer decides new software is needed Enquiry decision time Request for information Asks for specification and estimates Receipt of information Receives proposal Customer decision time Decide on surgery Request for product/service Places order Waiting time Enter hospital for surgery Procedure successfully completed Installation time Patient fully recovered Start of core processing End of core processing ‘Installed’ product/service fully operational Start of design and coding Core processing time Software ‘completed’ Software fully debugged and working Significant ‘milestone’ times for the delivery of two products/services

First/Business class Economy class Services First/Business-class cabin, airport lounges, pick-up service Economy cabin Customers Wealthy people, business people, VIPs Travellers (friends and family), vacation takers, cost-sensitive business travel Service range Wide range, may need to be customised Standardised cabin Rate of service innovation Relatively high Relatively low Volume of activity Relatively low volume Relatively high volume Profit margins Medium to high Low to medium Main competitive factors Customisation, extra service, comfort features, convenience Price, acceptable service Performance objectives Quality (specification and conformance), Flexibility, Speed Cost, Quality (conformance) Different product groups require different performance objectives

Operations strategy is different from operations management Example: capacity decisions Short-term capacity decisions Long-term capacity decisions Demand Time scale Operations strategy Demand Operations management 1– 12 months 1–-10 years

Operations strategy is different from operations management Operations management Level of analysis Micro level of the process Operations strategy Macro level of the total operation

Operations strategy is different from operations management Operations management Level of aggregation Detailed For example “Can we give tax services to the small business market in Antwerp? ” Operations strategy Aggregated For example “What is our overall business advice capability compared with other capabilities? ”

Operations strategy is different from operations management Operations management Level of abstraction Concrete For example “How do we improve our purchasing procedures? ” Operations strategy Philosophical For example “Should we develop strategic alliances with suppliers? ”

Strategic Fit for reconciliation

Market requirements and operations resources perspectives of operations strategy Strategic reconciliation Operations resources OPERATIONS STRATEGY Market requirements Operations strategy reconciles the requirements of the market with the capabilities of operations resources

Market requirements Operations resources What you HAVE What you DO What you WANT What you NEED in terms of operations capabilities to maintain your capabilities and satisfy markets from your operations to help you ‘compete’ to ‘compete’ in the market Strategic reconciliation

Continuous improvement at a strategic level Operations resources The operation’s capabilities and performance Market requirements DEPLOY operation’s contribution by exploiting superior capabilities DEVELOP operations capabilities through learning The operation’s resources and processes Potential competitive position in the market place MARKET STRATEGY DIRECT performance Getting the fit right Intended competitive position in the market place

getting the fit right Market requirements ‘Fit’ means that the operation’s resources and processes are aligned with the requirements of its markets. it ine L f of Operation’s resource capability

Market requirements Deviations? it ine L f of Operation’s resource capability

The four perspectives on operations strategy Top-down perspective What the business wants operations to do Operations resources perspective What operations resources can do Operations strategy What day-to-day experience suggests operations should do Bottom-up perspective Market requirement perspective What the market position requires operations to do

Top-down and bottom-up perspectives of strategy Corporate strategy Business strategy Operations strategy Emergent sense of what the strategy should be Operational experience

The strategy hierarchy Key strategic decisions Influences on decision making Corporate strategy What business to be in? What to acquire? What to divest? How to allocate cash? Economic environment Social environment Political environment Company values and ethics Business strategy What is the mission? What are the strategic objectives of the firm? How to compete? Customer/market dynamics Competitor activity Core technology dynamics Financial constraints Functional strategy How to contribute to the strategic objectives? How to manage the function’s resources? Skills of function’s staff Current technology Recent performance of the function

Trade-offs “Do you want it good, or do you want it Tuesday? ” “No such thing as a free lunch. ” “You can’t have an aircraft which flies at the speed of sound, carries 400 passengers and lands on an aircraft carrier. Operations are just the same. ” (Skinner) “Trade-offs in operations are the way we are willing to sacrifice one performance objective to achieve excellence in another. ”

Market requirements, operations resources and strategic reconciliation at VW over 70 years Operations resources 1946– 1951 Implementing strategy Building up capacity and capability 1952– 1958 Continuity of strategy Strategic reconciliation Systemisation of resources and process 1959– 1964 Minor change and continuity Minor reconfiguration for new model Simple design Standardised design New 1500 model Market requirements Emerging, any working vehicle Maturing, simple robust vehicle Maturing, sophisticated performance, quality

Market requirements, operations resources and strategic reconciliation at VW over 70 years 1965– 1970 Search for viable strategy Operations resources Fragmented acquisition of new resources 1971– 1975 Emergent strategy Adapt best practices from enlarged group 1976– 1979 Continuing with minor changes Accommodate new models and acquisitions Strategic reconciliation Multiple new designs Defined range Product development paths Market requirements Uncertain rejection of VW traditional products Clarifying around style, quality and variety Segmentation around performance, style and variety

Market requirements, operations resources and strategic reconciliation at VW over 70 years Operations resources 1990– 1996 Major change (internal) Drastic reconfiguration to increase efficiency, reduce costs 1997– 2000 Implementing strategy Continuous process improvement and cost reduction 2001– 2007 Lean process Implementing improvement and more low-cost locations strategy Strategic reconciliation Market requirements Design for lowcost manufacture Common product platforms Modular design Increasingly competitive around price Branding with price, quality, and style Increasingly competitive around price and innovation

Categories of Business Strategies

First-to-Market Strategy l Products available before competition l Strong applied research capability needed l Can set high price to skim market or set lower price to gain market share

Second-to-Market Strategy l Quick imitation of first-to-market companies l Less emphasis on applied research and more emphasis on development l Learn from first-to-market’s mistakes

Cost Minimization or Late-to-Market Strategy l Wait until market becomes standardized and large volumes demanded l Compete on basis of costs instead of product features l Research efforts focus on process development versus product development

Strategy Formulation

Five Steps for Strategy Formulation l Defining a primary task l l Assessing core competencies l l l What wins the order? What qualifies an item to be considered for purchase? Positioning the firm l l What does the firm do better than anyone else? Determining order winners and order qualifiers l l What is the firm in the business of doing? How will the firm compete? Deploying Strategy l How corporate strategies will be translated into measurable objectives?

01. Primary Task Mission statements express organization’s primary task: What business a company is in? Constitution, The Corporate directives

02. Assessing Core Competencies l Collective knowledge and skills an organization has that distinguish it from the competition. l Typically center on an organization’s ability to integrate a variety of specific technologies and skills in the development of new products and services. l Building blocks of core capabilities. l Are basis on which new outputs are developed. l Better to think of organization in terms of its portfolio of core competencies than as a portfolio of products. l Identifying and developing core competencies is one of top management’s most important roles.

Examples of Core Competencies Sony - miniaturization l 3 M- knowledge of substrates, coatings and adhesives l Honda - engines and power trains l 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

Competitive Priorities Corporate strategy • goals • core competencies • environmental responses • new products/services • global strategies

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

Competitive Priorities Corporate strategy • goals • core competencies • environmental responses • new products/services • global strategies Market analysis • segmentation • needs assessment Competitive priorities Operations • cost • quality • time • flexibility Marketing Finance Others

Competitive Priorities Corporate strategy • goals • core competencies • environmental responses • new products/services • global strategies Cost Quality 1. Low-cost operations 2. High-performance design Market analysis • segmentation 3. Consistent quality • needs assessment Time 4. Fast delivery 5. On-time delivery 6. Development speed Flexibility 7. 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 Operations • cost • quality • time • flexibility Marketing Finance Others

Competitive Priorities Corporate strategy • goals • core competencies • environmental responses • new products/services • global strategies Market analysis • segmentation • needs assessment Competitive priorities Operations • cost • quality • time • flexibility Marketing Finance Others Functional area strategies • • finance marketing operations others

Competitive Priorities Corporate strategy • goals • core competencies • environmental responses • new products/services • global strategies Market analysis • segmentation • needs assessment Competitive priorities Capabilities Operations • cost • quality • time • flexibility • current • needed • plans Marketing Finance Others Functional area strategies • • finance marketing operations others

Strategy and Decisions Corporate strategy

Strategy and Decisions Corporate strategy Market analysis

Strategy and Decisions Corporate strategy Market analysis Competitive priorities

Strategy and Decisions Corporate strategy Market analysis Competitive priorities Operations strategy

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

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

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

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

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

Competitive Strategy: The Positioning View l Options for firm positioning: Cost leadership l Differentiation l Focus l l And, within each of the three: Variety-based l Needs-based l Access-based l

Competitive Strategy: The Resource-Based View l Types of capabilities l Process-based l e. g. , l Mc. Donald’s Systems- or coordination-based l e. g. , Ritz-Carlton l e. g. , Southwest Airlines l Organization-based l e. g. , l Nucor Steel Network-based l e. g. , Dell

Competitive Strategy: Integrating the Positioning and Resource-Based Views

How Strategy Is Made

Levels of Strategy-Making

Business Strategy: Focus on the Customer l Types of customer needs Must haves l Linear satisfiers l Delighters l Neutral l

Strategy-Making in Context

Strategy-Making: Cross-Functional Participation

Operations Strategy: Decision Categories l Structural decisions l l Vertical integration Process technology Capacity Facilities l Infrastructural decisions l l l Sourcing Information technology Supply chain coordination Business processes and policies Capabilities development l l l Lean operation Quality Flexibility

Integrated Strategy-Making Framework

03. Determining Order Winners / Order Qualifiers

Distinguish Order Qualifiers from Order Winners l Order Qualifiers: Competitive priorities that a product must meet to even be considered for purchase l Generally, represented by features shared by all competitors in a given market niche l l Order Winners: l Competitive priorities that distinguish the firm’s offerings from competitors & ultimately win the customer’s order

Competitive benefit Order-winning factors +ve Neutral –ve Performance Competitive benefit Order-Qualifying factors +ve Neutral –ve Qualifying level Performance

Qualifiers are the ‘givens’ of doing business Order Winners gain more business the better you are Adding Delights become Order winners and Order winners become Qualifiers Delights Order winners Neutral Qualifiers e Tim Competitive benefit Positive Negative Low Achieved performance High

What performance objectives are Qualifiers, Order Winners and Delights ? … and in the future ? What is the operation doing today to develop the capabilities which will provide the ‘Delights’ of the future ? Today Delights Order winners Qualifiers Tomorrow ? ? ?

04. Positioning The Firm: Competitive priorities

Competitive Priorities l. Cost l. Quality l. Flexibility l. Speed

Which enables you to do things cheaply (cost advantage)? Which enables you to change what you do (flexibility advantage)? Which enables you to do things quickly (speed advantage)? Which enables you to do things on time (dependability advantage)? Which enables you to do things right (quality advantage)?

Competing on Cost ü Eliminate ü Invest ü ü ü all waste in Updated facilities & equipment Streamlining operations Training & development

Competing on Quality ü Please ü the customer Understand customer attitudes toward and expectations of quality

Competing on Flexibility ü Produce wide variety of products ü Introduce new products ü Modify existing products quickly ü Respond to customer needs

Competing on Speed ü Fast moves ü Fast adaptations ü Tight linkages

Product / Service Design Strategies

Operations Strategy: Products and Services l Make-to-order l products and services are made to customer specifications after an order has been received l Make-to-stock l products and services are made in anticipation of demand l Assemble-to-order l products and services add options according to customer specifications

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

Market Orientation and Customer Experienced Lead Time

Process Strategy Matrix

Product-Process Matrix Source: Robert Hayes and Steven Wheelwright, Restoring the Competitive Edge: Competing Through Manufacturing (New York: John Wiley & Sons, 1984), p. 209

– Hi gh er Vo lu m e St an da rd ize d Continuous Production A paper manufacturer produces a continuous sheet paper from wood pulp slurry, which is mixed, pressed, dried, and wound onto reels. Mass Production M or e Here in a clean room a worker performs quality checks on a computer assembly line. Batch Production At Martin Guitars bindings on the guitar frame are installed by hand are wrapped with a cloth webbing until glue is dried. Project Construction of the aircraft carrier USS Nimitz was a huge project that took almost 10 years to complete.

Service-Process Matrix Source: Adapted from Roger Schmenner, “How Can Service Businesses Survive and Prosper? ” Sloan Management Review 27(3): 29

La bo r. I nt en si v e Cu st om i ze d. Le ss Service Factory Electricity is a commodity available continuously to customers. Mass Service A retail store provides a standard array of products from which customers may choose. Service Shop Although a lecture may be prepared in advance, its delivery is affected by students in each class. Professional Service A doctor provides personal service to each patient based on extensive training in medicine.

A X B The ‘efficient frontier’ Variety The ‘efficient frontier’ view A X C B 1 The new ‘efficient frontier’ B C D Cost efficiency

Deploying Strategy

Policy Deployment ü Hoshin Kanri ü Focuses employees on common goals & priorities ü Translates strategy into measurable objectives ü Aligns day-to-day decisions with strategic plan

Balanced Scorecard ü Finance — How should we look to our shareholders? ü Customer — How should we look to our customers? ü Processes — At which business processes must we excel? ü Learning and Growing — How will we sustain our ability to change and improve?

Key Performance Indicators Source: Robert Kaplan and David Norton, Strategy Maps: Converting Intangible Assets into Tangible Outcomes (Boston: Harvard Business School Press, 2004), Figure 3 -2, p. 67

Strategic Decisions in OM

Operations Strategy: Capacity and Facility l Capacity strategic decisions include: l l When, how much, and in what form to alter capacity Facility strategic decisions include: l whether demand should be met with a few large facilities or with several smaller ones l whether facilities should focus on serving certain geographic regions, product lines, or customers l facility location can also be a strategic decision

Operations Strategy: Human Resources l What is skill levels and degree of autonomy required to operate production system? l What are training requirements and selection criteria? l What are policies on performance evaluations, compensation, and incentives? l Will workers be salaried, paid an hourly rate, or paid a piece rate? l Will profit sharing be allowed, and if so, on what criteria?

Operations Strategy: Human Resources l Will workers perform individual tasks or work in teams? l Will they have supervisors or work in self-managed work groups? l How many levels of management will be required? l Will extensive worker training be necessary? l Should workforce be cross-trained? l What efforts will be made in terms of retention?

Operations Strategy: Quality l What is target level of quality for our products and services? l How will it be measured? l How will employees be involved with quality? l What will be the responsibilities of the quality department?

Operations Strategy: Quality (cont. ) l What types of systems will be set up to ensure quality? l How will quality awareness be maintained? l How will quality efforts be evaluated? l How will customer perceptions of quality be determined? l How will decisions in other functional areas affect quality?

Operations Strategy: Sourcing l Vertical integration l l degree to which a firm produces parts that go into its products Strategic Decisions l How much of work should be done outside the firm? l On what basis should particular items be made in-house? l When should items be outsourced? l How should suppliers be selected?

Operations Strategy: Sourcing (cont. ) l What type of relationship should be maintained with suppliers? l What l How is expected from suppliers? many suppliers should be used? l How can quality and dependability of suppliers be ensured? l How can suppliers be encouraged to collaborate?

Operations Strategy: Operating Systems l How will operating systems execute strategic decisions? l How to align information technology and operations strategic goals? l How information technology supports both customer and worker demands for rapid access, storage, and retrieval of information? l How information technology support decisions making process related to inventory levels, scheduling priorities, and reward systems?

Changing Corporation Source: John Byrne, “Management by Web, ” Business Week (August 28, 2000), p. 87 by special permission, copyright 2000 by The Mc. Graw-Hill Companies, Inc. : Characteristic 20 th-Century Corporation 21 st-Century Corporation Organization Pyramid Web Focus Internal External Style Structures Flexible Source of strength Stability Change Structure Self-sufficiency Interdependencies Resources Physical assets Information Leadership Dogmatic Inspirational Workers Employees Free agents Job expectations Security Personal growth

Changing Corporation Operations 20 th-Century Corporation Vertical integration 21 st-Century Corporation Virtual integration Products Mass production Mass customization Reach Domestic Global Financials Quarterly Real-time Inventories Months Hours Strategy Top-down Bottom-up Motivation To compete To build Improvements Incremental Revolutionary Quality Affordable best No compromise Characteristic