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Chapter 3

Strategy and Value:


Competing Through
Operations

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc. 2008

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 Porters 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.
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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.

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Supply Chains
Basic
Producer

Converters

Fabricators

Assemblers

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
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Supply Chains

Exhibit 3.1
Generic
Supply Chain
Model

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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?
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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?
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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.


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Operations Management Framework


A strategy 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.
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.

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The Strategic Hierarchy


Mission Statement
Corporate Strategy
Business Strategy
Operations Strategy
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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

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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

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Business & Operations Strategy


Understand what is
valued in the market
Choose which attributes
to emphasize

Cost

4
Cost

Quality
Response
Time
Dependability

1
3

Quality

2
Dependability

Convenience

Prioritize those
attributes

Style/
Fashion

Ethics

Design operations to
support those priorities

Flexibility

Response
Time

Technology

Flexibility

Personalization

REMINDER:

Operations management is The


management of resources used to
create saleable products and
services
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Operations Strategy
Operations Strategy
How to design the operation
How to allocate productive
resources
Functional strategies
must support one
another as well as the
higher level strategies!!

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Environmental Scanning
Enables the business to stay abreast of changes
in

Technology
Customer expectations
Competitors offerings
Global politics
Regulations
Costs of inputs

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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
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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

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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

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Strategic Decision Categories and Value

Structural and infrastructural


decisions affect value, and
ultimately whether or not
the customers 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.

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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.

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Value Attributes and Competitive Priorities

The value
attributes
customers
want . . .

must dictate how


operations makes
resource
decisions

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Summary of Competitive Effects of


Structural Decisions

Insert Exhibit 3.10

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Summary of Competitive Effects of


Infrastructural Decisions

Insert Exhibit 3.11

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Strategic Objectives, Capabilities, and Process


Requirements
Marys Speedy Pizza
Guaranteed Pizza Delivery in 20 minutes

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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.

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Order Losers, Order Qualifiers, Order


Winners
Example: Taking a group of children to lunch
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: 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.


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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 .

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