Operations strategy is …..

Strategic
“… the decisions which shape the long- Reconciliation

term capabilities of the company’s Operations OPERATIONS Market

Resources STRATEGY Requirements
operations and their contribution to overall
strategy through the on-going
Operations strategy reconciles the
reconciliation of market requirements and requirements of the market with the
capabilities of operations resources
operations resources …”

Operations management Operations strategy

Short-term Long-term
Corporate strategy
for example, capacity for example, capacity
decisions decisions
Time scale
Demand

Demand

1-12 months 1-10 years Business strategy

Micro Macro
level of the process level of the total operation
Level of
analysis Operations
strategy
Detailed Aggregated
Level of For example For example Emergent sense of
“Can we give tax services to “What is our overall business what the strategy
aggregation the small business market in advice capability compared should be
Antwerp?” with other capabilities?”
Concrete Philosophical
Level of For example For example
abstraction “How do we improve our “Should we develop strategic
purchasing procedures?” alliances with suppliers?” Operational
experience
Operations strategy is different from operations management
Top-down and bottom-up perspectives of strategy

CUSTOMERS
Segmentation on:
•Age - youth
•Purpose - general

Customer
PERFORMANCE OBJECTIVES Needs
MARKET POSITION
•Dependability Differentiation on:
•Speed of delivery •Innovative products Market
•Product mix flexibility •Time to market Performance
Positioning
•Speed to market •Product range Objectives
•Coordinated launches
Competitors’
COMPETITORS Actions
Traditionally weak in:
Required Understanding
•promotion performance markets
•design innovation

The market perspective on operations strategy

The market perspective analysis of the garment company

1
 Resources
Tangible
•Equipment
•Staff Tangible and
Intangible
•Reputation Intangible
•Relationships Resources
(internal and external)
•Experience
Operations Operations
Operations Strategy Capabilities Strategy
Capabilities Decision Areas
Decisions
• Application of leading- •Location
edge lighting and •Virtual reality technology
sound technology •Supplier development Operations
•Equipment tracking system Processes
• Articulation of client
requirements •Organizational structure
•Staff meetings Understanding Strategic
resources and decisions
processes
Processes
• Integration of equipment
supply and client The operations resource perspective on operations strategy
requirements
• Design process
• Supplier liaison process
The operations resource perspective analysis of the lighting company

Tangible and
Operations has to cope with the clash
Customer
Intangible
Resources
Needs between the nature of external markets and
the nature of internal resources
Operations Operations Market
Performance
Capabilities Strategy Positioning
Objectives
Decision Areas

Operations Competitors’ Operations Market Requirements

Processes Actions Resources are…. are….
Understanding Strategic Required Understanding
resources and decisions performance markets Difficult to change Dynamic
processes
Technically Heterogeneous
constrained
Ambiguous
Operations strategy is the strategic reconciliation of
Complex
market requirements with operations resources

Operations strategy is the strategic reconciliation of

market requirements with operations resources Operations Market
Strategic
Operations Resources Reconciliation Market Requirements Resources Requirements
Operations Market
Resources Segmentation

Operations
What you What you What you What you
Operations Performance Market
Competences
Strategy Objectives Positioning HAVE DO WANT NEED
Decisions

Operations Competitor to maintain

Activity from your
Processes in terms of your operations to
operations capabilities to “compete”
help you
Understanding Strategic Required Understanding capabilities and satisfy “compete” In the market
Resources and Decisions Performance Markets markets
Processes
Capacity Quality
Supply networks Speed Strategic
Process technology Dependability
Development and Flexibility Reconciliation
organization Cost

2
 Existing
Operations can kick-start two virtuous cycles ‘effective’
Internal and capability
External

wide
Lafage
Understanding of Cosmetics’
the processes

Variety of items per order

requirements
Competitiveness Strong
marketing
Existing
‘effective’
Competencies capability
embedded in the World Class
operation Operations
Store
High delivery
Catalogue

narrow
margin
Capabilities enhance customers
innovation and
improvement Investment small large
Number of items per order
Developing the resources Developing customers’
which let the operation’s competitors’ and Hagen Style – Comparison of new demands placed on the order
performance stay ahead of the stockholders; perceptions and
competition fulfilment processes by potential new business opportunities
expectations

Strategic
Reconciliation
Operations Resources Market Requirements

• Cost efficiency • Traditional Operations OPERATIONS Market

• 2 x distribution centers • Fast delivery ‘representative’ Resources STRATEGY Requirements
• State-of-art packing and sales channels
information technology declining in
popularity
• Processes ‘fine tuned’ to
traditional ‘representative’
• As above plus •New channels Operations strategy content Operations strategy process
sales channels
• wider range • catalogue
• Good at what it does of requirements • Internet
Resource Usage

• cost efficient • more demand

competitiveness
• discount Align resources with
• fast throughput Level 1 - Fit
Performance

fluctuations? requirements
objectives

stores Market
Develop sustainable
Level 2 - Sustainability
competitive advantage
Include impact of
Level 3 - Risk
Hagen Style – Operations resources and market requirements Decision areas
uncertainty

Hospital Milestone Software producer

First/Business class Economy class
Presentation Awareness of Customer decides new
need Services First/Business-class cabin, Economy cabin
of symptoms software is needed
airport lounges, pick-up
Enquiry decision time
service
Visit to doctor for Request for Asks for specification
advice and tests information and estimates Customers Wealthy people, business Travellers (friends and
people, VIPs family), vacation takers, cost-
Enquiry time
sensitive business travel
Test information Receipt of
Receives proposal Service range Wide range, may need to be Standardized cabin
confirms diagnosis information
customised
Customer decision time Rate of service
Relatively high Relatively low
Decide on Request for innovation
product/service Places order
surgery Volume of activity Relatively low volume Relatively high volume
Waiting time
Profit margins Medium to high Low to medium
Enter hospital Start of core Start of design
for surgery processing and coding
Core processing time Main competitive Customization, extra service, Price, acceptable service
End of core factors comfort features, convenience
Procedure successfully Software ‘completed’
completed processing
Installation time Performance Quality (specification and Cost, Quality (conformance)
‘Installed’ objectives conformance), Flexibility, Speed
Patient fully product/service Software fully debugged
recovered fully operational and working
Different product groups require different performance objectives
Significant ‘milestone’ times for the delivery of two products/services

3
 Positive
Order-winners
Quality Being RIGHT

Competitive benefit
Less important
Speed Being FAST
Neutral
Dependability Being ON TIME Qualifiers

Flexibility Being ABLE TO CHANGE

Negative
Low High
Cost Being PRODUCTIVE
Achieved performance

The operations function can provide a competitive advantage Order-winners and qualifiers
through its performance at the five competitive objectives

Profit Output Profit

x
Total assets = Total assets Output

Profit Revenue Cost

Output = Output x Output
Customer
Needs Average Average
Importance to
customers revenue cost

Priority of
performance Output Output Fixed assets Capacity
= x x
objectives Total assets Capacity Total assets Fixed assets

Performance against Competitors’ Utilization Working capital Productivity of

competitors Actions fixed assets

The priority of performance objectives is influenced by Operations strategy Capacity Supply Process Development and
what is regarded as important by customers and how decision areas network technology organization
the operation performs against competitors

Decomposing the ratio profit/total assets

The Elements of an International Operations Strategy Resource Usage

Resource Deployment

Capacity Supply Process Development and

Structure Network Technology Organization
Issues include: Issues include: Issues include: Issues include:
•Total capacity •Vertical integration •Rate of development •Responsibility
•Number, size of sites •Network behaviour •Automation relationships
ISSUES - •Performance and
ISSUES -
• Do it yourself or • New •Allocation of tasks to •Supplier relationships •Integration
control
ISSUES - product/service sites •Supplier development •Implementation
buy-in?
• Development rate development •Location •Subcontracted •Process development
ISSUES -
• Capacity
• Customer and • Automation • Organization development •Product and service
• Location
development
supplier
relationships • Size •
structure
Performance Process Development and
• Focus & • Supply chain • Integration measurement
Capacity Supply Network
Technology Organization
segmentation dynamics and • In our out-house • Improvement
• L/T forecasts integration development strategy
The four categories of operations strategy decision areas
Operations Decisions are shaped by
COMPETENCIES and CONSTRAINTS

4
 Operations strategy is defined by the intersections
of performance objectives and Operations
Process Development and
decisions Resource Usage
Capacity Supply Network
Technology Organization

Market Competitiveness
Competitive Objectives
Quality

are prioritized by
CUSTOMERS and
Structural issues

COMPETITORS
Speed

Infrastructural Dependability
issues
Flexibility

Cost
Operations strategy decision areas are partly structural and
Development
partly infrastructural Supply Process and
Capacity Technology Organization
Network

Operations Decisions shape

COMPETENCIES and CONSTRAINTS

Resource Usage
7-Eleven Japan Largest retailer in Japan
Sells 1.5X as much per store as nearest rival
History of cautious expansion and technical and
Performance objectives

Quality service innovation

Competitiveness

Speed “Field Counsellors” spread operations knowledge

(also do distance training)
Market

Operations
Dependability strategy Expansion by territory to reduce disn costs
Flexibility Early use of TIS (total information system)
TIS controls stock replenishment twice a day
Cost delivery (sales analysed twice a day)
Supply Process Development New system not internet-based
Capacity Network Technology and
Organization
New services include,
Decision areas
Banking terminals
Downloading games
The operations strategy matrix
Downloading music to MD
Internet ordering and collection

Resource Deployment

QUALITY of products Distribution center Information sharing

and services grouping by and parenting
temperature system spreads
 service ideas 
Speed and Distribution centers
Market Competitiveness

dependability and inventory

combined to management
Increasing complexity

indicate systems give fast Align resources with

AVAILABILITY stock replenishment Level 1 - Fit
 requirements
FLEXIBILITY of TIS allows trends to TIS gives
response to sales be forecast and comprehensive and
and customer supply adjustments sophisticated Develop sustainable
made analysis of sales & Level 2 - Sustainability
trends supply patterns competitive advantage
daily
 
COST in terms of Area dominance Common distribution Field counselors Include impact of
minimizing…
reduces distribution centers give small with sales data help Level 3 - Risk
•operating cost
and advertising
costs
frequent deliveries stores to minimize uncertainty
from fewer sources waste and increase
•capital cost  sales
•working capital  
•Location of stores •Number and type of •The Total •Franchisee
•Size of stores distribution centers Information System relationships
•Order and stock (TIS) •New The practice of operations strategy involves considering
product/service
7-11 JAPAN replenishment
development fit, sustainability and risk
•Approach to
operations
improvement
 pivotal DEVELOPMENT
 critical SUPPLY PROCESS AND
 secondary CAPACITY NETWORKS TECHNOLOGY ORGANIZATION

5
 Market requirements

Market requirements

Extension of market
requirements
Alignment
between market
and operations
capability
X

Improvements in
operations capabilities

Y Level of operations resource capability

Level of operations resource capability

In operations strategy ‘fit’ is the alignment between market and Sustainable improvement implies simultaneous extension/improvement
operations capability of market requirements and operations capabilities

Quality
(specification)
Market requirements

Virgin Trains Cost Quality

X X (conformance)
X

Delivery X X Speed
flexibility

Nissan X
X X

Volume Dependability
flexibility
Customization
Current products
Level of operations resource capability New products

Dresding Medical - Polar diagram illustrating the relative

Virgin Trains and Nissan positioned in relation to market requirements
importance of the performance objectives for the current
and operations capabilities
and new products

Resource Usage Resource Usage

Market Competitiveness

Market Competitiveness

*** Quality (spec) ** Quality (spec)

Performance objectives

Performance objectives

** * *** * ***
**Quality (conform) * * ** ***Quality (conform) *** ***
Speed Speed * **
**
Dependability
** * ** * * Dependability **
Delivery flex * * Delivery flex *
* *
Volume flex Volume flex *** *
**
* ** Customization ** * *** Customization
Cost * * Cost *** **
* Capacity Supply Process Development
*** Capacity Supply Process
*
Development
Network Technology and Network Technology and
Organization Organization
*** very important Lab style 50% of Low R&D, Mfg. and *** very important May need to New Needs R&D, Mfg. and
** medium importance manufacture activities in- process Sales all share ** medium importance adjust quickly supplies will investment Sales less
* some importance easy to house technology common * some importance depending on be needed / in volume interdependent.
change (but high knowledge demand developed processes Faster time-to-
capacity product base. market needed
incrementally technology) Incremental
new product
development
Decision areas Decision areas

Dresding Medical - Dresding Medical - New product range

Slide 2.17
Current product range

6
 ‘Fit’ is concerned with ensuring comprehensiveness, Resource Usage
correspondence, coherence and criticality

Market Competitiveness
Resource Usage Issues include:
Quality • Capacity levels

Performance
objectives
Speed • Number of
Dependability sites
Performance objectives

Quality Coherence Critical

• Size of sites

Competitiveness
Correspondence

Flexibility
Speed • Location
Cost

Market
Dependability Critical

Flexibility Critical

Cost Critical Critical

Capacity Supply Process Development
(configuration) Networks Technology and
Supply Process Development Organization
Capacity Technology and
Network Decision areas
Organization
Decision areas
Comprehensive?

Ice Cream Division Canned Food Division

Capacity Actual output Actual output
Efficiency = Efficiency =
Strategy Effective capacity Effective capacity

= 3724 = 90.08% = 4622 = 85.01%

4134 5437

Configuring Managing Avoidable Planned

Planned Avoidable
Capacity Capacity Change Loss Loss Loss Loss
Total Total 2459
Capacity 3762 410 Capacity 815
hrs hrs hrs hrs
7896 7896
hrs hrs Effective
Effective Actual Capacity
Overall Location Timing Magnitude Location of Capacity
Type of Output Actual
Level of of of of changed 5437 Output
Capacity 4134 3724
Capacity Capacity Change Change capacity hrs hrs
3724
hrs
hrs

Utilization = Actual output Utilization = Actual output

Issues in capacity strategy Total capacity Total capacity
3724 4622
= = 47.16% = = 58.54%
7896 7896

Utilization and efficiency measures for two divisions of a

food processing company

Issues include…..

Forecast
Availability level of
of capital NUMBER OF
demand
SITES
Cost structure Changes in
of capacity future
increment demand
OPERATIONS Overall level MARKET CAPACITY OF LOCATION OF
RESOURCES of capacity REQUIREMENTS EACH SITE EACH SITE
Uncertainty
Economies
of future
of scale
demand
Flexibility of Consequences
capacity of over/under
provisions supply ALLOCATION LONG-TERM
a
OF TASKS CAPACITY
TO EACH SITE CHANGE
Some factors influencing the overall level of capacity STRATEGY

7
 Questions:
“Who should be involved in these decisions?”
“How does the company make this type of decision?” Why is capacity strategy important?
Questions Options
Many small sites?
NUMBER OF SITES and
CAPACITY OF SITES
Without an appropriate capacity
Few larger sites?
strategy operations will always
Supply side dominated?
be struggling to supply markets
LOCATION
OF SITES Demand side dominated?
in a competitive manner

ALLOCATION OF TASKS
All sites make all products/services?
TO SITES Each site focuses on a few products/ Getting capacity strategy right is
services?
the starting point for developing
LONG-TERM CAPACITY Capacity leads demand? competitive operations
CHANGE STRATEGY
Capacity lags demand?

How should one judge a capacity strategy ?

Should capacity lead or lag demand ?

Capacity leads demand Capacity lags demand

NUMBER
OF SITES

Capacity
What
performance
Volume

Volume
CAPACITY OF LOCATION OF Demand Demand
EACH SITE EACH SITE measures will
Capacity
all these
decisions ?
have a major
ALLOCATION LONG-TERM impact on ?
OF TASKS CAPACITY
TO SITES CHANGE
STRATEGY Time Time

•What competitive objectives will be affected?

The three options …..

Demand

Capacity
12
Forecast demand = 9000 units

10
Costs / Revenue ($)

Time Time
8
Demand Cost
Capacity 6

4
Revenue
Time 2

Demand 0
0 2 4 6 8 10 12
Capacity Volume in thousands of units

Time
Cost, volume, profit illustration

8
 Cash flow with
extended physical
capacity

Unit cost (total cost / volume)

Unit cost (total cost / volume)

Cash flow with two

8 8 Physical identical capacity
capacity of Demand increments
facilities
6 6
Time
Nominal Diseconomies
4 4 of scale kick in
capacity
limit
2 2 Effective Capacity

0 0
0 1 2 3 4 5 6 0 1 2 3 4 5 6 Time
Volume in thousands of units Volume in thousands of units

(a) (b)
Expanding physical capacity in advance of effective
capacity can bring greater returns in the longer term
Unit cost curve

Resource Required
costs service level
Land and
Economies Required Suitability
facilities
of scale service level of site
investment
Size and
OPERATIONS MARKET OPERATIONS Location of MARKET
number of
RESOURCES REQUIREMENTS RESOURCES sites REQUIREMENTS
sites
Geographical
Supply Resource Image of
distribution
costs availability location
of demand
Community
factors

Some factors influencing the number and size of sites Some factors influencing the location of sites

$US
4m Revenue

Fast food restaurant Electronics manufacturer

3m
Revenue

Revenue 3 Brayford
facilities
Costs Costs
2m 1 Bi-line 8 facility &
1 Brayford facility

Location A Location B Location A

Location of operation Location of operation 1m

(a) (b)

(a) Location concerned with profit maximization; 150000

Current volume
(b) Location concerned with cost minimization 1000 2000 3000 4000
Monthly volume (kg)

Cost-volume-profit curves for two alternative capacity strategies