CHAPTER TWO

OPERATIONS STRATEGY & COMPETITIVENESS

2.1 INTRODUCTION TO OPERATIONS STRATEGY
Operations strategy: Operations strategy is concerned with setting broad policies and plans for
using the resources of the firm to best support the firm’s long-term competitive strategy. It has a
long-term impact on the nature and characteristics of the organization. In large measure,
strategies affect the ability of an organization to compete.

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 ‘process’ 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. Nor is there universal agreement on how an operations
strategy should be described.

OPERATIONS COMPETITIVE DIMENSIONS

Given the choices customers face today, how do they decide which product or service to buy?
Different customers are attracted by different attributes. Some customers are interested primarily
in the cost of a product or service and, correspondingly, some companies attempt to position
themselves to offer the lowest prices. Companies must be competitive to sell their goods and
services in the market place. Business organizations compete with one another in variety of ways
i.e. by identifying operating priorities. The major competitive dimensions ( operations priorities)
priorities
that form the competitive position of a firm include the following:

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1. Cost: “Make the product or deliver the service cheap.” within every industry, there is
usually a segment of the market that buys strictly on the basis of low cost. To successfully
compete in this niche, a firm must be the low-cost producer, but even doing this not always
guarantee profitability and success.

2. Quality:
Quality: “Make a great product or deliver a great service.” There are two characteristics of
a product or service that define quality: design quality and process quality.
quality. Design quality
relates to the set of feature the product or service contains. This relates directly to the design
of the product or service. The goal in establishing the proper level of design quality is to
focus on the requirements of the customer. Overdesigned products and service with too many
or inappropriate features will be viewed as prohibitively expensive. In comparison,
underdesigned products and services will lose customers to products that cost a little more
but are perceived by customers as offering greater value. Process quality is critical because
it relates directly to reliability of the product or service. Thus, the goal of process quality is to
produce defect-free product and service.

3. Delivery speed/timeliness: “Make the product or deliver the service quickly.” The elapsed
time between customers requesting products or services and receiving them. A company that
can offer an on- site repair service in only 1 or 2 hours has a significant advantage over a
competing firm that guarantees service only within 24 hours. The three
t delivery speed
priorities are:
a) Fast delivery time: delivery time is the elapsed time between receiving a customer
order and filling it. Sometime it is known as lead time.
b) On time delivery: measures the frequency in which delivery promise is met.
c) Development speed: measures how quickly a new product is introduced covering
from idea generation to commercialization. It is important especially in the fashion
applied industry.
Delivery Reliability: “Deliver it when promised.” This dimension relate to the firm’s ability to
supply the product or service on or before a promised delivery due date.
4. Flexibility: the ability to respond to changes. The better a company as able to respond to
changes, the greater the competitive advantage over another company that is not able to

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 respond. Flexibility could be pursuing through value adding system. The two
t types of
flexibility priorities are:
i. Customization: the ability to satisfy the unique needs of each customer by changing a
product design.
ii. Volume flexibility: the ability to accelerate or decelerates the rate of production quickly to
handle fluctuations and demand.

Order Winners and Qualifiers:

Qualifiers: The Marketing – Operations Link
An interface between marketing and operations is necessary to provide a business with an
understanding of its market from both perspectives. Terry Hill, a professor at Oxford University,
has coined the terms order winner and order qualifier to describe marketing oriented dimensions
that key to competitive success.

Order Winner:
Winner: An order winner is a criterion that differentiates the products or services of one
firm from another. Depending on the situation, the order winning criterion may be the cost of the
product (price), product quality and reliability, or any of the other dimensions. Order winners can
be defined as the characteristics
c of a firm that distinguish it from its competition so that it is
selected as the source of purchase.

Order qualifier:
qualifier: An order qualifier is a screening criterion that permits a firm’s products even
be considered as possible candidates for purchase. Order-qualifiers can be defined as the
minimum elements or characteristics that a firm or its products must have to even be considered
as a potential supplier or source.

In Europe, for example, the vast majority of companies today require that their vendors be ISO-
9000 certified. (This certification ensures that a firm has documented all of its processes.) Thus,
ISO-9000 certification is an order-qualifier in Europe. In contrast, most companies in Canada at
this time are not ISO-9000 certified. As a consequence, ISO-9000-certified companies in Canada
use their certification as an order-winner (that is, ISO-9000 certification distinguishes them as
being better than their competition).

It is important to remember that the order-winning and order-qualifying may change overtime.
Basically, when very few firms offer a specific characteristic, such as high quality,

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customization, or outstanding service, that characteristic can be defined as an order-winner.
However, over time, as more and more firms begin to offer that same enhancement, the order-
winner becomes an order-qualifier. In other words, it becomes the minimum acceptable level for
all competitors. As a result, the customer uses some other new enhancement or characteristic to
make the final purchase.

Strategies:
Strategies: are plans for achieving goals. The organization strategy provides the overall direction
for the organization. It is broad in scope, covering the entire organization. Operations strategy is
narrower in scope, dealing primarily with the operations aspect of the organization.
Operations Strategy relates to products, processes, methods, operating resources quality, costs,
lead times, and scheduling.

DEVELOPING OPERATIONS STRATEGY

An operations strategy is a strategy for the operations functions that is linked to the business
strategy and other functional strategy, leading to a consistence pattern of decision making and
competitive advantage for the firm. An operations strategy consists of a sequence of decisions
that, over time, enables a business unit to achieve a desired operations structure, infrastructure,
and set of specific capabilities in support of the competitive priorities.
Elements of operations strategy
Mission: describes the purposes of the organization, the reason for its existence.
Objectives: As noted previously the objectives of operations are cost, quality, delivery and
flexibility. These objectives should be derived from the mission, and they constitute a
restatement of the mission in quantitative and measurable terms.
Policies: Policies should indicate how the operations objective will be achieved.
Distinctive competence: distinctive competence is something that operations do better than
anyone else, and are those especial attributes or abilities processed by organizations that give it a
competitive edge. That means something that is differentiated from its competitors.
Strategy can be considered to exist at three levels in an organization
a) Corporate strategy: defines what business the company pursuing. Corporate level strategy
is the highest level of strategy. It sets the long-term direction and scope for the whole
organization. If the organization comprises more than one business unit, corporate level

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 strategy will be concerned with what those businesses should be, how resources (e.g. cash)
will be allocated between them, and how relationships between the various business units and
between the corporate centre and the business units should be managed. Organizations often
express their strategy in the form of a corporate mission or vision statement.
Key issues
F What businesses shall we be in?
F What businesses shall we acquire or divest?
F How do we allocate resources between businesses?
F What is the relationship between businesses?
F What is the relationship between the centre and the businesses?
b) Business strategy: follows from the corporate strategy and defines how a particular business
will compete or how to become better within industry. Business level strategy is primarily
concerned with how a particular business unit should compete within its industry, and what
its strategic aims and objectives should be. Depending upon the organization’s corporate
strategy and the relationship between the corporate centre and its business units, a business
unit’s strategy may be constrained by a lack of resources or strategic limitations placed upon
it by the centre. In single business organizations, business level strategy is synonymous with
corporate level strategy. It can be in the form of:
 Customer intimacy: This strategy requires excellent customer management process such as
relationship management and solution development. A customer intimate company builds
bonds with its customers. It knows the people to whom it sells and the product and services it
needs.
 Product leadership: Product leadership strategy would require a leading edge innovation
process that creates new products with best in class functionality and brings them to market
rapidly.
 Operational excellence strategy: this strategy emphasizes cost, quality, quickness of
operating process, excellent supplier relationships, and speed and efficiency supply and
distribution process.
c) Functional level strategy: The bottom level of strategy is that of the individual function
(operations, marketing, finance, etc.). These strategies are concerned with how each function

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 contributes to the business strategy, what their strategic objectives should be and how they
should manage their resources in pursuit of those objectives.

The two diametrically opposite business strategies are:

A. Product imitator (operational excellence) business strategy
This would be a typical of a mature, price sensitive market with standardized product. In this
case, the operations mission would emphasize cost as the dominant objective and operations
should strive to reduce costs through such polices as superior technology, low personnel cost,
low inventory levels, a high degree of integration, and quality assurance aimed at saving costs.

B. Product innovation and new product introduction (product leadership)

This strategy would typically be used in an emerging and possibly growing market where
advantages can be gained by bringing out superior-quality product in short amount of time. In
this case, operations would emphasize flexibility to rapidly and effectively introduce superior
new product as its mission.

Criteria for Evaluating an Operations Strategy

Consistency (is the strategy consistent…?)
F Between the operations strategy and the overall business strategy
F Between the operations strategy and the other functional strategies within the business
F Between the different decision areas of operations strategy
F Between the operations strategy and the business environment (resources available,
competitive behavior, governmental restraints, etc)

Contribution to competitive advantage (Does the strategy …?)

F Enable operations to set priorities that enhance the competitive advantage
F Directing attention to opportunities that complement the business strategy
F Promoting clarity regarding the operations strategy throughout the business unit so its
potential can be fully realized
F Providing the operations capabilities that will be required by the business in the future

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Model of the strategic role of operations
Hayes and Wheelwright’s four stage model is underpinned by their belief that an organization’s
operations can provide a source of competitive advantage. It can only do this if the operations
function is managed strategically. As such, they argue, all organizations should aspire to reach
the highest level possible, ultimately reaching stage 4. The four-stage models of the strategic role
of operations are discussed below.

Stage 1 Internally Neutral: The operations function is internally focused and reactive. They are
viewed as a ‘necessary evil’. The best that the organization hopes for is that operations ‘don’t
screw up’. A stage 1 organization finds it impossible to manage its operations strategically, as its
operations performance objectives are continually changing between low cost, increased
flexibility, improved quality, etc. Because operations managers never have the time to focus on a
consistent set of objectives, a stage 1 organization is characterized by a reactive approach to
operations management. In such an organization, operations can never provide a source of
competitive advantage.

Stage 2 Externally Neutral: The operations function tries to be as good as the competition, or to
achieve parity with industry norms. Such an organization is likely to benchmark its operations
against its competitors, and adopt best practice in its industry so that it does not hold the
organization back.

A stage 2 organization manages its operations by seeking to emulate those of its competitors. It
is likely to copy the prevailing best practices of its industry, such as JIT (just-in-time), TQM
(total quality management), BPO (business process outsourcing) etc. However, as they always
adopt these techniques in the wake of industry leaders, they are never likely to have developed
the same level of expertise in their application. The best that such an approach can achieve is to
match the operations performance of its competitors. Although the combination of operations
practices adopted by a stage 2 organization may be considered by some as amounting to an
operations strategy in that they are consistent, they will not be overtly linked to business strategy.
Indeed, it may be that such an operations strategy is inappropriate for the organization’s business
strategy. In any event, a stage 2 organization’s operations cannot provide the basis for
competitive advantage.

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Stage 3 Internally Supportive: The operations function seeks to provide credible support for
the organization’s business strategy. An operations strategy will be developed which will be
derived from, and support, the business strategy. The organization’s operations are likely to be
amongst the best in its industry.

A stage 3 organization has an operations strategy that is linked to and derived from its business
strategy. This means that its operations performance objectives are aligned with, and supportive
of, its business objectives, offering the possibility that operations can provide the means of
achieving a competitive advantage. The chances of achieving competitive advantage will be
considerably increased if the organization has adopted industry best practice in its operations.

Stage 4 Externally Supportive: The operations function provides the basis of competitive
advantage for the organization, by setting the standard in their industry. The operations function
is likely to aim to be world class by seeking to emulate best practice wherever it is to be found.
Operations will be seen as the means of exceeding customer expectations by delighting the
customer. Operations will be managed proactively to drive the business strategy of the
organization.

A stage 4 organization is radically different to one at any of the other stages. A stage 4
organization uses its operations excellence as the basis for its business strategy – an operations-
based strategy. The operations of a stage 4 organization are at the forefront of developments in
best practice in that they set industry standards in ways that delight customers. Thus, the
organization’s operations enable it to retain its existing customers and attract new ones. For an
operations-based competitive advantage to be sustainable, the organization must continually
develop its operations, as any source of advantage is liable to be imitated by competitors. To
remain at stage 4, an organization needs to learn how to make the most of its existing resources
and competences to learn how to develop new capabilities. Recent advances in the understanding
of organizational performance have emphasized the importance of path dependency (i.e. how
organizations got to their present position), the dynamic nature of the capabilities on which
organizational success ultimately depends and the role of organizational learning.

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2.2 OPERATIONS STRATEGY IN MANUFACTURING

Operation strategy cannot be designed in vacuum. It must be linked vertically to the customer
and horizontally to other parts of the enterprise.

Developing a manufacturing strategy

The main objectives of manufacturing strategy development are:
F To translate required competitive dimensions (typically obtained from marketing) into
specific performance requirement for operations and
F To make the plan necessary to ensure that operations (and enterprise) capabilities are
sufficient to accomplish them. The steps for prioritizing these dimensions are as follows:
1. Segment the market according to the product group
2. Identify the product requirements, demand patters, and profit margin of each group.
3. Determine the order winners and order qualifiers for each group.
4. Convert order winners into specific performance requirements.
The process of achieving a satisfactory manufacturing segmentation that maintains focus is often
a matter of deciding which products or product groups fit together in the sense that they have
similar market performance characteristics or place similar demands on the manufacturing
system.

2.3 OPERATIONS STRATEGY IN SERVICES

Operations strategy in service firms is generally inseparable from the corporate strategy. For
most services, the service delivery system is the business, and hence any strategic decision must
include operations considerations.

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