IU, Department of Management

Unit Two

Operations Strategy and competitiveness

1.1. Introduction

To maintain a competitive position in the marketplace, a company must have a long-range plan.
This plan needs to include the company’s long-term goals, an understanding of the marketplace,
and a way to differentiate itself from its competitors. All other decisions made by the company
must support this long-rang plan. Otherwise, each person in the company would pursue goals
that he or she considered important, and the company would quickly fall apart.

The functioning of a football team on the field is similar to the functioning of a business and
provides a good example of the importance of a plan or vision. Before the plays are made, the
team prepares a game strategy. Each player on the team must perform a particular role to support
this strategy. The strategy is a “game plan” designed so that the team can win. Imagine what
would occur if individual players decided to do plays that they thought were appropriate.
Certainly the team’s chance of winning would not be very high. A successful football team is a
unified group of players using their individual skills in support of a winning strategy. The same
is true of a business.

The long-range plan of a business, designed to provide and sustain shareholder value, is called
the business strategy. For a company to succeed, the business strategy must be supported by
each of the individual business functions, such as operations, finance, and marketing.
Operations strategy is a long-range plan for the operations function that specifies the design
and use of resources to support the business strategy. Just as the players on a football team
support the team’s strategy, the role of everyone in the company is to do his or her job in a way
that supports the business strategy.

Let’s look at two companies operating in the same industry, but with very different business
strategies. The first is Southwest Airlines, which has a strategy to compete on cost. Southwest
offers low-cost services aimed at price-sensitive customers. To support this strategy, every aspect
of Southwest’s operations is focused on cutting costs out of the system. The second company is
Singapore Airlines, which has a strategy to compete on service. To support this strategy the
airline offers free drinks, complimentary headsets, meals prepared by gourmet chefs, comfortable

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cabins, and even the biggest bed in business class called the “space bed.” Both airlines began as
regional carriers and each has grown to be a highly successful major airline. Although they are in
the same industry, their operations decisions are different because of their different business
strategies.

In today’s highly competitive, internet-based, and global marketplace, it is important for

companies to have a clear plan for achieving their goals. In this chapter we discuss the role of
operations strategy, its relationship with the business strategy, and ways in which the operations
function can best supportthe business strategy.

1.2. The Role of Operations Strategy

The role of operations strategy is to provide a plan for the operations function so that it can make
the best use of its resources. Operations strategy specifies the policies and plans for using the
organization’s resources to support its long-term competitive strategy. Figure 2-1 shows this
relationship.

Remember that the operations function is responsible for managing the resources needed to
produce the company’s goods and services. Operations strategy is the plan that specifies the
design and use of resources to support the business strategy. This includes the location, size, and
type of facilities available; worker skills and talents required; use of technology, special
processes needed, special equipment; and quality control methods. The operations strategy must
be aligned with the company’s business strategy and enable the company to achieve its long-term
plan. For example, the business strategy of FedEx, the world’s largest provider of expedited
delivery services, is to compete on time and dependability of deliveries. The operations strategy
of FedEx developed a plan for resources to support its business strategy. To provide speed of
delivery, FedEx acquired its own fleet of airplanes. To provide dependability of deliveries,
FedEx invested in a sophisticated bar code technology to track all packages.

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Business Strategy
Defines long-range plan
for company

Marketing Strategy Operations Strategy Finance Strategy

Defines marketing plans Develops a plan for the Develops financial plans
to support the business operations function to to support the business
strategy support the business strategy
strategy

Figure 2.1: Relationship between the business strategy and the functional strategy

1.3. Developing an Operations Strategy

A company‘s business strategy is developed after its managers have considered many factors and
have made some strategic decisions. These include developing an understanding of what
business the company is in (the company‘s mission), analyzing and developing an understanding
of the market (environmental scanning), and identifying the company‘s strengths (core
competencies).

Once a business strategy has been developed, an operations strategy must be formulated. This
will provide a plan for the design and management of the operations function in ways that
support the business strategy. The operations strategy relates the business strategy to the
operations function. It focuses on specific capabilities of the operation that give the company a
competitive edge. These capabilities are called competitive priorities. By excelling in one of
these capabilities, a company can become a winner in its market.

These competitive priorities and their relationship to the design of the operations function are
shown in figure 2.2. Each part of this figure is discussed next.

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Figure 2.2: Operations strategy and the design of the operations function

BUSINESS STRATEGY a) Competitive Priorities

Defines the long-range plans for the

company Operations managers must work closely with
marketing in order to understand the competitive
OPERATIONS STRATEGY situation in the company’s market before they can
determine which competitive priories are
Develops a plan for the operations
function focusing on specific important. There are four broad categories of
competitive priorities in order to
meet the long-range plan competitive priorities:
Competitive -Cost Cost- Competing based on cost means offering a
Priorities - Quality
-Time product at a low price relative to the prices of
- Flexibility
competing products. The need for this type of
competition emerges from the business strategy. The
DESIGN OF THE OPERATIONS role of the operations strategy is to develop a plan for
FUCNTION
the use of resources to support this type of
Developed to focus on the identified
competitive priorities competition.
Structure: Facilities, flow of goods,
technology

Infrastructure: Planning & control

system, workers, pay, quality

Note that a low-cost strategy can result in a higher profit margin, even at a competitive price.
Also, low cost does not imply low quality. Let’s look at some specific characteristics of the
operations function we might find in company competing on cost.

To develop this competitive priority, the operations function must focus primarily on cutting
costs in the system, such as costs of labor, materials, and facilities. Companies that compete
based on cost study their operations system carefully to eliminate all waste. They might offer
extra training to employees to maximize their productivity and minimize scrap. Also, they might
invest in automation in order to increase productivity. Generally, companies that compete based
on cost offer a narrow range of products and product features, allow for little customization, and
have an operations process that is designed to be as efficient as possible.

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A company that successfully competes on cost is Southwest Airlines. Southwest’s entire

operations function is designed to support this strategy. Facilities are streamlined: only one type
of aircraft is used, and flight routes are generally short. This service to minimize costs of
scheduling crew changes, maintenance, inventories of parts, and many administrative costs.
Unnecessary costs are completely eliminated: there are no meals, printed boarding passes, or seat
assignments. Employees are trained to perform many functions and use a team approach to
maximize customer service. Because of this strategy, southwest has been a model for the airline
industry for a number of years.

2. Quality- Many companies claim that quality is their top priority, and many customers say that
they look for quality in the products they buy. Yet quality has a subjective meaning; it depends
on who is defining it. For example, to one person quality could mean that the product lasts a long
time, such as with a Volvo, a car known for its longevity. To another person quality might mean
high performance, such as a BMW. When companies focus on quality as a competitive priority,
they are focusing on the dimensions of quality that are considered important by their customers.

Quality as a competitive priority has two dimensions. The first is high-performance design. This
means that the operations function will be designed to focus on aspects of quality such as
superior features, close tolerances, high durability, and excellent customer service. The second
dimension is goods and services consistency, which measures how often the goods or services
meet the exact design specifications. A strong example of product consistency is McDonald’s,
where we know we can get the same product every time at any location. Companies that compete
on quality must deliver not only high-performance design but goods and series consistency as
well.

A company that competes on this dimension needs to implement quality in every area of the
organization. One of the first aspects that need to be addressed is product design quality, which
involves making sure the product meets the requirements of the customer. A second aspect is
process quality which deals with designing a process to produce error-free products. This
includes focusing on equipment, workers, materials, and every other aspect of the operation to
make sure it works the way is supposed to. Companies that compete based on quality have to
address both of these issues: the product must be designed to meet customer needs, and the
process must produce the product exactly as it is designed.

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To see why product and process quality are both important, let’s say that your favorite fast-food
restaurant has designed a new sandwich called the “Big Yuck.” The restaurant could design a
process that produces a perfect “Big Yuck” every single time. But if customers find the “Big
Yuck” unappealing, they will not buy it. The same would be true if the restaurant designed a
sandwich called the “Super Delicious” to meet the desires of its customers. Even if the “Super
Delicious” was exactly what the customers wanted, if the process did not produce the sandwich
the way it was designed, often making it soggy and cold instead, customers would not buy it.
Remember that the product needs to be designed to meet customer wants and needs, and the
process needs to be designed to produce the exact product the was intended, consistently without
error.

3. Time or speed is one of the most important competitive priories today. Companies in all
industries are competing to deliver high-quality products in as short a time as possible.
Companies like FedEx, LensCrafters, United Parcel Service (UPS), and Dell compete based on
time. Today’s customers don’t want to wait, and companies that can meet their need for fast
service are becoming leaders in their industries.

Making time a competitive priority means competing based on all time-related issues, such as
rapid delivery and on-time delivery. Rapid delivery refers to how quickly and order is received;
on time delivery refers to the number of times deliveries are made on time. When time is a
competitive priority, the job of the operations function is to critically analyze the system and
combine or eliminate processes in order to save time. Often companies use technology to speed
up processes, rely on flexible workforce to meet peak demand periods, and eliminate
unnecessary steps in the production process.

FedEx is an example of a company that competes based on time. The company’s claim is to
“absolutely, positively” deliver packages on time. To support this strategy, the operation function
had to be designed to promote speed. Bar code technology is used to speed up processing and
handling, and the company uses its own fleet of airplanes. FedEx relies on a very flexible part-
time workforce, such as college students who are willing to work a few hours at night. FedEx
can call on this part-time workforce at a moment’s notice, providing the company with a great
deal of flexibility. This allows FedEx to cover workforce requirements during peak periods
without having to schedule full-time workers.

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4. Flexibility As a company’s environment changes rapidly, including customer needs and

expectations, the ability to readily accommodate these changes can be a winning strategy. This is
flexibility. There are two dimensions of flexibility. One is the ability to offer a wide variety of
goods or services and customize them to the unique needs of clients. This is called product
flexibility. A flexible system can quickly add new products that may be important to customers or
easily drop a product that is not doing well. Another aspect of flexibility is the ability to rapidly
increase or decrease the amount produced in order to accommodate changes in the demand. This
is called volume flexibility.

You can see the meaning of flexibility when you compare ordering a suit from a custom tailor to
buying it off the rack at a retailer. Another example would be going to a fine restaurant and
asking to have a meal made just for you, versus going to a fast-food restaurant and being limited
to items on the menu. The custom tailor and the fine restaurant are examples of companies that
are flexible and will accommodate customer wishes. Another example of flexibility is Empire
West Inc., a company that makes a variety of products out of plastics, depending on what
customers want. Empire West makes everything from plastic trays to body guards for cars.

Companies that compete based on flexibility often cannot compete based on speed, because it
generally requires more time to produce a customized product. Also, flexible companies
typically do not compete based on cost, because it may take more resources to customize the
product. However, flexible companies often offer greater customer service and can meet unique
customer requirements. To carry out this strategy, flexible companies tend to have moregeneral-
purpose equipment that can be used to make many different kinds of products. Also, workers in
flexible companies tend to have higher skill levels and can often perform many different tasks in
order to meet customer needs.

b) The Need for Trade-Offs

You may be wondering why the operations function needs to give special focus to some
priorities but not all. Aren’t all the priorities important? As more resources are dedicated toward
one priority, fewer resources are left for others. The operations function must place emphasis on
those priories that directly support the business strategy. Therefore, it needs to make trade-offs
between the different priorities. For example, consider a company that competes on using the

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highest quality components parts in its products. Due to the high quality of parts the company
may not be able to offer the final product at the lowest price. In this case, the company has made
a tradeoff between quality and price. Similarly, a company that competes on making each
product individually based on customer specifications will likely not be able to compete on
speed. Here, the trade-off has been made between flexibility and speed.

It is important to know that every business must achieve a basic level of each of the priorities,
even though its primary focus is only on some. For example, even though a company is not
competing on low price, it still cannot offer its products at such a high price that customers
would not want to pay for them. Similarly, even though a company is not competing on time, it
still has to produce its product within a reasonable amount of time; otherwise, customers will not
be willing to wait for it.

One way that large facilities with multiple products can address the issue of tradeoffs is using the
concept of plant-within-a-plant (PWP), introduced by well-known Harvard professor Wickham
Skinner. The PWP concept suggests that different areas of a facility be dedicated to different
products with different competitive priorities. These areas should be physically separated from
one another and should even have their own separate workforce. As the term suggests, there are
multiple plants within one plant, allowing a company to produce different products that compete
on different priorities. For example, hospitals use PWP to achieve specialization or focus in a
particular area, such as the cardiac unit, oncology, radiology, surgery, or pharmacy. Similarly,
department stores use PWP to isolate departments, such as the Sears auto service department
versus its optometry center.

C) Order Winners and Qualifiers

To help a company decide which competitive priorities to focus on, it is important to distinguish
between order winners and order qualifiers, which are concepts, developed by Terry Hill, a
professor at Oxford University. Order qualifiers are those competitive priorities that a company
has to meet if it wants to do business in a particular market.

Order winners, on the other hand, are the competitive priorities that help a company win orders
in the market. Consider a simple restaurant that makes and delivers pizzas. Order qualifiers
might be low price (say, less than $10.00) and quick delivery (say, under 15 minutes), because

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this is a standard that has been set by competing pizza restaurants. The order winners may be
“fresh ingredients” and “home-made taste.” These characteristics may differentiate the restaurant
from all the other pizza restaurants. However, regardless of how good the pizza, the restaurant
will not succeed if it does not meet the minimum standard for order qualifiers. Knowing the
order winners and order qualifiers in a particular market is critical to focusing on the right
competitive priorities.

It is important to understand that order winners and order qualifiers change over time. Often
when one company in a market is successfully competing using a particular order winner, other
companies follow suit over time. The result is that the order winner becomes an industry
standard or an order qualifier. To compete successfully, companies then have to change their
order winners to differentiate themselves. An excellent example of this occurred in the auto
industry. Prior to the 1970s, the order winning criterion in the American auto industry was price.
Then the Japanese automobile manufacturers entered the market competing on quality at a
reasonable price. The result was that quality became the new order winner and price becomes an
order qualifier, or an expectation. Then by the 1980s American manufacturers were able to raise
their level of quality to be competitive with the Japanese. Quality then became an order qualifier,
as everyone had the same quality standard.