Chapter two

Operations strategy and competitiveness

What is strategy?

Surprisingly, ‘strategy’ is not particularly easy to define. Linguistically the word derives from
the Greek word ‘strategos’ meaning ‘leading an army’. And although there is no direct historical
link between Greek military practice and modern ideas of strategy, the military metaphor is
powerful. Both military and business strategy can be described in similar ways, and include some
of the following.

● Setting broad objectives that direct an enterprise towards its overall goal.
● planning the path (in general rather than specific terms) that will achieve these goals.
● Stressing long-term rather than short-term objectives.
● Dealing with the total picture rather than stressing individual activities.
● Being detached from, and above, the confusion and distractions of day-to-day activities.
Here, by ‘strategic decisions’ we mean those decisions which are widespread in their effect on
the organization to which the strategy refers, define the position of the organization relative to its
environment, and move the organization closer to its long-term goals. But ‘strategy’ is more than
a single decision; it is the total pattern of the decisions and actions that influence the long-term
direction of the business. Thinking about strategy in this way helps us to discuss an
organization’s strategy even when it has not been explicitly stated. Observing the total pattern of
decisions gives an indication of the actual strategic behavior.

Operations strategy
Operations strategy concerns the pattern of strategic decisions and actions which set the role,
objectives and activities of the operation. The term ‘operations strategy’ sounds at first like a
contradiction. How can ‘operations’, a subject that is generally concerned with the day-to-day
creation and delivery of goods and services, be strategic? ‘Strategy’ is usually regarded as the
opposite of those day-to-day routine activities. But ‘operations’ is not the same as
‘operational’.

‘Operations’ are the resources that create products and services. ‘Operational’ is the opposite of
strategic, meaning day-to-day and detailed. So, one can examine both the operational and the
strategic aspects of operations. It is also conventional to distinguish between the ‘content’ and
the ‘processes of operations strategy. The content of operations strategy is the specific decisions
and actions which set the operations role, objectives and activities. The process of operations
strategy is the method that is used to make the specific ‘content’ decisions.
The process of operations strategy
Strategy formulation consists of five basic steps:
1. Defining a primary task
2. Assessing core competencies
3. Determining order winners and order qualifiers
4. Positioning the firm
5. Deploying the strategy
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PRIMARY TASK
The primary task represents the purpose of a firm—what the firm is in the business of doing. It
also determines the competitive arena. As such, the primary task should not be defined too
narrowly. For example, Norfolk Southern Railways is in the business of transportation, not
railroads. Paramount is in the business of communication, not making movies. The primary task
is usually expressed in a firm’s mission statement. Mission statements clarify what business a
company is in. Mission statements are the “constitution” for an organization, the corporate
directive, but they are no good unless they are supported by strategy and converted into action.
Thus, the next step in strategy formulation is assessing the core competencies of a firm.

CORE COMPETENCIES
Core competency is what a firm does better than anyone else, its distinctive competence. A
firm’s core competence can be exceptional service, higher quality, faster delivery, or lower cost.
One company may strive to be first to the market with innovative designs, whereas another may
look for success arriving later but with better quality. Based on experience, knowledge, and
know-how, core competencies represent sustainable competitive advantages. For this reason,
products and technologies are seldom core competencies.

The advantage they provide is short-lived, and other companies can readily purchase, emulate, or
improve on them. Core competencies are more likely to be processes, a company’s ability to do
certain things better than a competitor. Thus, while a particular product is not a core competence,
the process of developing new products is. For example, while the iPod was a breakthrough
product, it is Apple’s ability to turn out hit product after hit product (e.g., iPhone, iPad,
MacBook, etc.) that gives it that competitive advantage.

Core competencies are not static. They should be nurtured, enhanced, and developed over time.
Close contact with the customer is essential to ensuring that a competence does not become
obsolete. Core competencies that do not evolve and are not aligned with customer needs can
become core rigidities for a firm. Walmart and Dell, seemingly unstoppable companies in their
field, went astray when they failed to update their competencies to match changes in customer
desires. For Dell, the low cost and mail order delivery of computers did not match the customer’s
desire to see and test computers before purchase, or to receive personalized after-purchase
customer service. For Walmart, the obsession with lower costs led to image problems of a
behemoth corporation with little regard for employees, suppliers, or local communities.
Customers preferred to pay slightly more for the better designed products of more community-
involved companies like Target. To avoid these problems, companies need to continually
evaluate the characteristics of their products or services that prompt customer purchase; that is,
the order qualifiers and order winners.

ORDER WINNERS AND ORDER QUALIFIERS

A firm is in trouble if the things it does best are not important to the customer. That’s why it’s
essential to look toward customers to determine what influences their purchase decision.

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Order qualifiers are the characteristics of a product or service that qualify it to be considered for
purchase by a customer. An order winner is the characteristic of a product or service that wins
orders in the marketplace—the final factor in the purchasing decision. For example, when
purchasing a DVD or Blu-ray player, customers may determine a price range (order qualifier)
and then choose the product with the most features (order winner) within that price range. Or
they may have a set of features in mind (order qualifiers) and then select the least expensive
player (order winner) that has all the required features.

Order winners and order qualifiers can evolve over time, just as competencies can be gained and
lost. Japanese and Korean automakers initially competed on price but had to ensure certain levels
of quality before the U.S. consumer would consider their product. Over time, the consumer was
willing to pay a higher price (within reason) for the assurance of a superior-quality Japanese car.
Price became a qualifier, but quality won the orders. Today, high quality, as a standard of the
automotive industry, has become an order qualifier, and innovative design or superior gas
mileage wins the orders.

Order qualifiers will only take a firm so far. The customer expects the qualifiers, but is not
“vowed” by them. For example, a low price might be a qualifier, but reducing the price further
may not win orders if the features or design are not adequate. At a minimum, a firm should meet
the qualifiers. To excel, the firm needs to develop competencies that are in tune with the order
winners. Marketing helps to identify these qualifiers and winners. Oftentimes, these
characteristics are in the purview of operations and supply chain management, such as cost,
speed to the market, speed of delivery, or customization. Other characteristics such as product or
service design are supported by operations and supply chain management, but are not completely
under their control.

POSITIONING THE FIRM

No firm can be all things to all people. Strategic positioning involves making choices—choosing
one or two important things on which to concentrate and doing them extremely well. A firm’s
positioning strategy defines how it will compete in the marketplace—what unique value it will
deliver to the customer. An effective positioning strategy considers the strengths and weaknesses
of the organization, the needs of the marketplace, and the positions of competitors. Let’s look at
firms that have positioned themselves to compete on cost, speed, quality, and flexibility.

Competing on Cost
Companies that compete on cost relentlessly pursue the elimination of all waste. In the past,
companies in this category produced standardized products for large markets. They improved
yield by stabilizing the production process, tightening productivity standards, and investing in
automation. Today, the entire cost structure is examined for reduction potential, not just direct
labor costs. High-volume production and automation may or may not provide the most cost-
effective alternative. A lean production system provides low costs through disciplined
operations.

Competing on Speed

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More than ever before, speed has become a source of competitive advantage. The Internet has
conditioned customers to expect immediate response and rapid product shipment. Service
organizations such as McDonald’s, LensCrafters, and Federal Express have always competed on
speed. Now manufacturers are discovering the advantages of time-based competition, with build-
to-order production and efficient supply chains. In the fashion industry where trends are
temporary, Gap’s six-month time-to-market can no longer compete with the nine-day design-to-
rack lead time of Spanish retailer, Zara.

Competing on Quality
Most companies approach quality in a defensive or reactive mode; quality is confined to
minimizing defect rates or conforming to design specifications. To compete on quality,
companies must view it as an opportunity to please the customer, not just a way to avoid
problems or reduce rework costs.

To please the customer, one must first understand customer attitudes toward and expectations of
quality. One good source is the American Customer Satisfaction Index compiled each year by
the American Society for Quality and the National Quality Research Center. Examining recent
winners of the Malcolm Baldrige National Quality Award and the criteria on which the award
are based also provides insight into companies that compete on quality.

The Ritz-Carlton Hotel Company is a Baldrige Award winner and a recognized symbol of
quality. The entire service system is designed to understand the individual expectations of more
than 500,000 customers and to “move heaven and earth” to satisfy them. Every employee is
empowered to take immediate action to satisfy a guest’s wish or resolve a problem. Processes are
uniform and well defined. Teams of workers at all levels set objectives and devise quality action
plans. Each hotel has a quality leader who serves as a resource and advocate for the development
and implementation of those plans.

Competing on Flexibility
Marketing always wants more variety to offer its customers. Manufacturing resists this trend
because variety upsets the stability (and efficiency) of a production system and increases costs.
The ability of manufacturing to respond to variation has opened up a new level of competition.
Flexibility has become a competitive weapon. It includes the ability to produce a wide variety of
products, to introduce new products and modify existing ones quickly, and to respond to
customer needs.

National Bicycle Industrial Company fits bicycles to exact customer measurements. Bicycle
manufacturers typically offer customers a choice among 20 or 30 different models. National
offers 11,231,862 variations and delivers within two weeks at costs only 10% above standard
models.

STRATEGY DEPLOYMENT
“The difficulty is not in knowing what to do. It’s doing it,” said Kodak’s former CEO, George
Fisher. Implementing strategy can be more difficult than formulating strategy. Strategies

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unveiled with much fanfare may never be followed because they are hard to understand, too
general, or unrealistic. Strategies that aim for results five years or so down the road mean very
little to the worker who is evaluated on his or her daily performance. Different departments or
functional areas in a firm may interpret the same strategy in different ways. If their efforts are not
coordinated, the results can be disastrous. Strategy deployment converts a firm’s positioning
strategy and resultant order winners and order qualifiers into specific performance requirements.

2.2 Operations in manufacturing Strategy

Manufacturing organizations must produce and deliver products which match the expectations of
their customers.

Manufacturers must deal with complex global challenges such as increasing customer
expectations, lower cost competitors, fluctuating commodity prices and an unstable global
economy, all while depending on a network of partners and suppliers working seamlessly to
meet these rising demands. Accenture collaborates with manufacturers to help them devise agile
strategies, managing across a global ecosystem of suppliers, partners and customers.

2.3 operations in service strategy

As with manufacturing, service operations require a strategic approach. Metters, King-Metters,

Pullman and Walton describe the strategic planning process as a hierarchy consisting of strategic
positioning, service strategy, and tactical execution

STRATEGIC POSITIONING

Strategic positioning involves first defining the firm's target market. In other words, what is the
set of customers the firm seek to serve? Next, the firm must determine its core competence or
what will distinguish it from other service firms, i.e., cost leadership, differentiation, or focus. At
this point, the firm then must make decisions regarding its mission and high-level goals and
objectives.

SERVICE STRATEGY

At the service strategy level, the service firm must define its service concept, operating system
and service delivery system. The service strategy links the firm's strategic position with tactical
execution. The firm begins by determining its competitive priorities, and its order winners and
order qualifiers. Competitive priorities are the characteristics of the firm or things that it does
better than other service firms (e.g., low cost, quality, service, or flexibility). The firm's
competitive priority(s) must be both an order qualifier and an order winner. The order qualifier is
a characteristic that the service must possess in order to compete in the market. If the firm lacks
this then the consumer will not even consider purchasing the firm's service. The order winner is
the characteristic that will cause the consumer to purchase the firm's service over its competitors.
The service concept then is the set of competitive priorities that the target market values.

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The operating strategy describes how the firm's different functions (marketing, finance, and
operations) will support the service concept. If the firm's order winning competitive priority is
quality, what will operations do to ensure quality of the service and how will marketing promote
this characteristic?

The service delivery system defines the components of the system necessary to execute the
service concept. Examples of the needed variables are capacity requirements, quality
management systems, and management policies. Each of these should support the firm's
competitive priorities so that the firm is clearly distinct from its competitors.

TACTICAL EXECUTION

Finally, the firm approaches tactical execution issues. Tactical execution involves the day-to-day
activities required to function and support the service strategy. Included are capacity
management, facility location, inventory management, facility layout, supplier selection,
operations scheduling, staffing, and productivity improvement.

Decisions that are made in the above strategic planning process are heavily influenced by their
position on Marc McCluskey's service maturity model. This model divides service maturity into
four stages:

Stage 1: Baseline service—the focus is mainly on responding to requests in a timely manner.

Stage 2: Operational efficiency—the focus is on cost reduction

Stage 3: Customer support excellence—the focus is on efficiency

Stage 4: The focus is on changing the concept of service and growing market opportunity

Differences of manufacturing industry and service industry

Both strategies are more similar than different. But the differences lie within the implementation
of overall cost management and the relationship to individual performance, recognition, and
compensation.However contrast can be drawn on the following issues:

1) The manufacturer must make numerous choices that ultimately define a version of the
product. The Key Performance Indicators (KPIs) are product centric. As such, they must
consider the whole which ultimately leads to the profits versus quality dilemma. Note that
it is common to base bonuses on company (product) performance.

The service provider with the vertical strategy can focus KPIs on service specific
performance. This would imply greater flexibilities, opportunities, and more lucrative
compensation for individual performance.

2) In Service industry Op. Strategy is directly focused on Customer and their behavior. In
Manf. Industry main focus is on Customer too but through Product and its perceived
value. So strategy is product oriented. E.g. In a Restaurant main focus will be on
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 Responsiveness, Effectiveness, Efficiency of the Service whereas in a Car Factory (let’s
assume) focus is on Kaizen, Lean etc.

3) In service industry operational strategy can be of short term. I.e. Strategy can be changed
based upon feedback/command in a week/daily basis.  In Manf. Industry strategy is of
longer term. Management takes decision which is being followed for months/years.
Though it also improve/change but that take minimum of 6 months/years.

4) Operation Strategy of Services is comparatively lesser affected by technological

advancements/changes than that of Manufacturing industry.

5) Benchmarking play a big role in Manf. Industry operations whereas in services

Innovation/New concept have cutting edge.

However, the big difference is that services, i.e., companies that do not make a thing that takes
up space, and needs to have a manufacturing process, cannot use the Taylor method of scientific
management. Since they cannot use it, then most operations improvement tools, such as value
chain analysis, traditional I.E. type workplace analysis have to be modified. You instead have to
take a look at things like dwell, or wait time in, for example, email queues, cell phone voice
mail, etc. you have to look at processing time in terms of things other than take time, etc. the
gains from a normal analysis and improvement of a standard manufacturing process could be
from 20 to 40 percent depending on the existing level of automation, the level of government
involvement in the product being made, and the level of consumer risk for the product that is
being sold. In the case of services, there are similar concerns, but everything can and should
move much faster, with business case analysis for improvements taking a different form than
what you might be used to.

Similarities
1) the prime objective of the manufacture is to provide a cost effective quality product that
exceeds the expectations of the consumer. For the service provider, the prime objective is to
provide a cost effective quality service that (again) exceeds the expectations of the consumer.

2) Many service industry outputs do not have "touch and feel" products. This in itself does not
mean the delivery of service (experience, knowledge or skill) is measured very differently from a
manufacturing setup. Both manufacturing and service industries are driven by processes that can
be measured and benchmarked by metrics such as Quality, Cost and on time delivery (speed).

3) In some service industries, the operations strategy will have to be more focused on dynamic
price optimization as the output cannot be inventoried (airline, rental car, hotel etc.,) compared to
most manufactured goods.

4) Strategy in both cases has to be customer oriented and should generate value in the system.

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