Operations Performance Chapter 2 Operations Performance

Contents Definition? The Reality Check Operations Strategy Vs Operations Management Strategic Fit Categories of Business Strategies Strategy Formulation Primary Task, Core Competencies, Order winners/qualifiers, competitive priorities, Process strategy matrix, policy deployment 2

Operations Strategy: Definition

Operations Strategy ‘… the decisions which shape the long-term capabilities of the company’s operations and their contribution to overall strategy through the on-going reconciliation of market requirements and operations resources …’

Why Strategic Perspective in Operations The Reality Check: Why Strategic Perspective in Operations

Today’s market demands… Quality Being RIGHT Speed Being FAST Dependability Being ON TIME Competitiveness Being ABLE TO CHANGE Flexibility Cost Being PRODUCTIVE

how performance objectives trade-offs between each other and The relative importance of the market requirements and operations resource perspectives change over time, how performance objectives trade-offs between each other and operations focus can lead to exceptional performance TRADE-OFFS Performance objective A Performance objective B ? Relative importance of the Operations Resource perspective Relative importance of the Market Requirements perspective

You are commanding Army 1, the objective is to capture the island You are commanding Army 1, the objective is to capture the island. Army 2 has the same objective Army 1 Island Army 2

Burn Island Army 2 Army 1

Do not Burn Island Army 2 Army 1

Broad strategic objectives for a parcel delivery operation applied to stakeholder groups Society Increase employment Enhance community well-being Produce sustainable products Ensure clean environment Suppliers Continue business Develop supplier capability Provide transparent information Customers Appropriate product or service specification Consistent quality Fast delivery Dependable delivery Acceptable price Shareholders Economic value from investment Ethical value from investment Employees Continuous employment Fair pay Good working conditions Personal development 2

Three Major Trading Regions International Markets and Producers Three Major Trading Regions Previously firms classified as domestic, exporters, or international Now have global firms, joint ventures, foreign subsidiaries

Strategy and Issues During a Product’s Life

Ginger Hotels No-frills June 2004 No room service, travel desk, swimming pool Wi-fi Two type of room: Rs. 999 and Rs. 1199 Prabhat Pani, CEO, RootsCorporation

BillDesk, a property of IndiaIdeas.com Ltd., 2000 Three Arthur Anderson Executives Third-party bill collection 25 Banks, 100 companies

Op Strategy and Op Management Difference between Op Strategy and Op Management

Hospital Milestone Software producer Presentation of symptoms Awareness of need Customer decides new software is needed Enquiry decision time Visit to doctor for advice and tests Request for information Asks for specification and estimates Enquiry time Receipt of information Test information confirms diagnosis Receives proposal Customer decision time Decide on surgery Request for product/service Places order Waiting time Start of core processing Enter hospital for surgery Start of design and coding Core processing time End of core processing Procedure successfully completed Software ‘completed’ Installation time ‘Installed’ product/service fully operational Patient fully recovered Software fully debugged and working Significant ‘milestone’ times for the delivery of two products/services

Different product groups require different performance objectives First/Business-class cabin, airport lounges, pick-up service Economy cabin Wealthy people, business people, VIPs Travellers (friends and family), vacation takers, cost-sensitive business travel Wide range, may need to be customised Standardised cabin Relatively high Relatively low Relatively low volume Relatively high volume Medium to high Low to medium First/Business class Economy class Customisation, extra service, comfort features, convenience Quality (specification and conformance), Flexibility, Speed Price, acceptable service Cost, Quality (conformance) Services Customers Service range Rate of service innovation Volume of activity Profit margins Main competitive factors Performance objectives Different product groups require different performance objectives

Operations management Operations strategy is different from operations management Example: capacity decisions Operations management Operations strategy Short-term capacity decisions 1–12 months Demand Long-term capacity decisions 1–-10 years Demand Time scale

Operations management Operations strategy is different from operations management Operations management Operations strategy Level of analysis Micro level of the process Macro level of the total operation

Operations management Operations strategy is different from operations management Operations management Operations strategy Level of aggregation Detailed For example “Can we give tax services to the small business market in Antwerp?” Aggregated For example “What is our overall business advice capability compared with other capabilities?”

Operations management Operations strategy is different from operations management Operations management Operations strategy Level of abstraction Concrete For example “How do we improve our purchasing procedures?” Philosophical For example “Should we develop strategic alliances with suppliers?”

Strategic Fit for reconciliation

Strategic reconciliation Market requirements and operations resources perspectives of operations strategy Strategic reconciliation OPERATIONS STRATEGY Operations resources Market requirements Operations strategy reconciles the requirements of the market with the capabilities of operations resources

What you HAVE What you DO What you WANT What you NEED Operations resources Market requirements Strategic reconciliation What you HAVE in terms of operations capabilities What you DO to maintain your capabilities and satisfy markets What you WANT from your operations to help you ‘compete’ What you NEED to ‘compete’ in the market

Continuous improvement at a strategic level Operations resources Market requirements DEPLOY operation’s contribution by exploiting superior capabilities Potential competitive position in the market place The operation’s capabilities and performance DEVELOP operations capabilities through learning MARKET STRATEGY Intended competitive position in the market place The operation’s resources and processes DIRECT performance Getting the fit right

Operation’s resource capability getting the fit right ‘Fit’ means that the operation’s resources and processes are aligned with the requirements of its markets. Line of fit Market requirements Operation’s resource capability

Operation’s resource capability Deviations? Line of fit Market requirements Operation’s resource capability

The four perspectives on operations strategy Top-down perspective What the business wants operations to do Operations resources perspective What operations resources can do Market requirement perspective What the market position requires operations to do Operations strategy What day-to-day experience suggests operations should do Bottom-up perspective 1 29

Top-down and bottom-up perspectives of strategy Corporate strategy Business strategy Operations strategy Emergent sense of what the strategy should be Operational experience

Key strategic decisions Influences on decision making The strategy hierarchy Key strategic decisions Influences on decision making Corporate strategy What business to be in? What to acquire? What to divest? How to allocate cash? Economic environment Social environment Political environment Company values and ethics Business strategy What is the mission? What are the strategic objectives of the firm? How to compete? Customer/market dynamics Competitor activity Core technology dynamics Financial constraints Functional strategy How to contribute to the strategic objectives? How to manage the function’s resources? Skills of function’s staff Current technology Recent performance of the function

Trade-offs “Do you want it good, or do you want it Tuesday?” “No such thing as a free lunch.” “You can’t have an aircraft which flies at the speed of sound, carries 400 passengers and lands on an aircraft carrier. Operations are just the same.” (Skinner) “Trade-offs in operations are the way we are willing to sacrifice one performance objective to achieve excellence in another.”

Market requirements, operations resources and strategic reconciliation at VW over 70 years 1946–1951 Implementing strategy Emerging, any working vehicle Building up capacity and capability Simple design 1952–1958 Continuity of strategy Systemisation of resources and process Maturing, simple robust vehicle Standardised design 1959–1964 Minor change and continuity Minor reconfiguration for new model New 1500 model Maturing, sophisticated performance, quality

Market requirements, operations resources and strategic reconciliation at VW over 70 years 1965–1970 Search for viable strategy Fragmented acquisition of new resources Multiple new designs Defined range Adapt best practices from enlarged group Uncertain rejection of VW traditional products Clarifying around style, quality and variety Accommodate new models and acquisitions Segmentation around performance, style and variety Product development paths Operations resources Market requirements 1971–1975 Emergent strategy 1976–1979 Continuing with minor changes Strategic reconciliation

Market requirements, operations resources and strategic reconciliation at VW over 70 years 1990–1996 Major change (internal) Drastic reconfiguration to increase efficiency, reduce costs Design for low- cost manufacture Common product platforms Continuous process improvement and cost reduction Increasingly competitive around price Branding with price, quality, and style Lean process improvement and more low-cost locations Increasingly competitive around price and innovation Modular design Operations resources Market requirements 1997–2000 Implementing strategy 2001–2007 Strategic reconciliation

Categories of Business Strategies

First-to-Market Strategy Products available before competition Strong applied research capability needed Can set high price to skim market or set lower price to gain market share

Second-to-Market Strategy Quick imitation of first-to-market companies Less emphasis on applied research and more emphasis on development Learn from first-to-market’s mistakes

Cost Minimization or Late-to-Market Strategy Wait until market becomes standardized and large volumes demanded Compete on basis of costs instead of product features Research efforts focus on process development versus product development

Strategy Formulation

Five Steps for Strategy Formulation Defining a primary task What is the firm in the business of doing? Assessing core competencies What does the firm do better than anyone else? Determining order winners and order qualifiers What wins the order? What qualifies an item to be considered for purchase? Positioning the firm How will the firm compete? Deploying Strategy How corporate strategies will be translated into measurable objectives?

Constitution, The Corporate directives 01. Primary Task Mission statements express organization’s primary task: What business a company is in? Constitution, The Corporate directives

02. Assessing Core Competencies Collective knowledge and skills an organization has that distinguish it from the competition. Typically center on an organization’s ability to integrate a variety of specific technologies and skills in the development of new products and services. Building blocks of core capabilities. Are basis on which new outputs are developed. Better to think of organization in terms of its portfolio of core competencies than as a portfolio of products. Identifying and developing core competencies is one of top management’s most important roles.

Examples of Core Competencies Sony - miniaturization 3M- knowledge of substrates, coatings and adhesives Honda - engines and power trains Core Competencies Used to Gain Access to Variety of Markets Cannon core competencies in optics, imaging, and electronic controls Products include copiers, laser printers, cameras, and image scanners. Boeing integrating large scale systems commercial jetliners, space stations, missiles

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies The next series of slides presents Figure 2.1. The series builds in steps to the final Figure.

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment The next series of slides presents Figure 2.1. The series builds in steps to the final Figure.

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment Competitive priorities Operations Marketing cost quality Finance time flexibility Others The next series of slides presents Figure 2.1. The series builds in steps to the final Figure.

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies Cost 1. Low-cost operations Quality 2. High-performance design 3. Consistent quality Time 4. Fast delivery 5. On-time delivery 6. Development speed Flexibility 7. Customization 8. Volume flexibility Market analysis segmentation needs assessment The next series of slides presents Figure 2.1. The series builds in steps to the final Figure. This slide expands on Competitive Priorities by highlighting the material from the Chapter. This is not part of Figure 2.1 in the text but is drawn from slightly later in the Chapter.

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment Competitive priorities Operations Marketing cost quality Finance time flexibility Others The next series of slides presents Figure 2.1. The series builds in steps to the final Figure.

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment Competitive priorities Operations Marketing cost quality Finance time flexibility Others The next series of slides presents Figure 2.1. The series builds in steps to the final Figure. Functional area strategies finance marketing operations others

Competitive Priorities Corporate strategy goals core competencies environmental responses new products/services global strategies Market analysis segmentation needs assessment Competitive priorities Operations Marketing cost quality Finance time flexibility Others Capabilities current needed plans The next series of slides presents Figure 2.1. The series builds in steps to the final Figure. Functional area strategies finance marketing operations others

Strategy and Decisions Corporate strategy Each element of the Figure is added in order.

Strategy and Decisions Corporate strategy Market analysis

Strategy and Decisions Corporate strategy Market analysis Competitive priorities

Strategy and Decisions Corporate strategy Market analysis Competitive priorities Operations strategy

Strategy and Decisions Corporate strategy Market analysis Competitive priorities Services Manufacturing Standardized services Assemble-to-order Customized services Make-to-stock Make-to-order Operations strategy This slide shows the classic operations strategies in a larger font to facilitate discussion.

Strategy and Decisions Corporate strategy Market analysis Competitive priorities Operations strategy Services Manufacturing Standardized services Assemble-to-order Customized services Make-to-stock Make-to-order

Strategy and Decisions Corporate strategy Market analysis Competitive priorities Operations strategy Process decisions Quality decisions Capacity, location, and layout decisions Operating decisions Services Manufacturing Standardized services Assemble-to-order Customized services Make-to-stock Make-to-order This slide shows the four key decision areas in a larger font to facilitate discussion.

Strategy and Decisions Corporate strategy Market analysis Competitive priorities Operations strategy Services Manufacturing Standardized services Assemble-to-order Customized services Make-to-stock Make-to-order Process decisions Quality decisions Capacity, location, and layout decisions Operating decisions

Strategy and Decisions Corporate strategy Market analysis Competitive priorities Capabilities Operations strategy Services Manufacturing Standardized services Assemble-to-order Customized services Make-to-stock Make-to-order Process decisions Quality decisions Capacity, location, and layout decisions Operating decisions

Competitive Strategy: The Positioning View Options for firm positioning: Cost leadership Differentiation Focus And, within each of the three: Variety-based Needs-based Access-based

Competitive Strategy: The Resource-Based View Types of capabilities Process-based e.g., McDonald’s Systems- or coordination-based e.g., Ritz-Carlton e.g., Southwest Airlines Organization-based e.g., Nucor Steel Network-based e.g., Dell

Competitive Strategy: Integrating the Positioning and Resource-Based Views

How Strategy Is Made

Levels of Strategy-Making

Business Strategy: Focus on the Customer Types of customer needs Must haves Linear satisfiers Delighters Neutral

Strategy-Making in Context

Strategy-Making: Cross-Functional Participation

Operations Strategy: Decision Categories Structural decisions Vertical integration Process technology Capacity Facilities Infrastructural decisions Sourcing Information technology Supply chain coordination Business processes and policies Capabilities development Lean operation Quality Flexibility

Integrated Strategy-Making Framework

Order Winners / Order Qualifiers 03. Determining Order Winners / Order Qualifiers

Distinguish Order Qualifiers from Order Winners Competitive priorities that a product must meet to even be considered for purchase Generally, represented by features shared by all competitors in a given market niche Order Winners: Competitive priorities that distinguish the firm’s offerings from competitors & ultimately win the customer’s order

Order-Qualifying factors Competitive benefit Order-winning factors +ve Neutral –ve Neutral +ve –ve Performance Competitive benefit Qualifying level Order-Qualifying factors Performance

Delights become Order winners and Order winners become Qualifiers Adding Delights Order Winners gain more business the better you are Low High Negative Positive Neutral Achieved performance Competitive benefit Time Delights Order winners Qualifiers Qualifiers are the ‘givens’ of doing business

What performance objectives are Qualifiers, Order Winners and Delights ? … and in the future ? ??? What is the operation doing today to develop the capabilities which will provide the ‘Delights’ of the future ? Today Tomorrow Delights Order winners Qualifiers

Competitive priorities 04. Positioning The Firm: Competitive priorities

Competitive Priorities Cost Quality Flexibility Speed

Which enables you to do things cheaply (cost advantage)? Which enables you to change what you do (flexibility advantage)? Which enables you to do things quickly (speed advantage)? Which enables you to do things on time (dependability advantage)? Which enables you to do things right (quality advantage)?

Competing on Cost Eliminate all waste Invest in Updated facilities & equipment Streamlining operations Training & development

Competing on Quality Please the customer Understand customer attitudes toward and expectations of quality

Competing on Flexibility Produce wide variety of products Introduce new products Modify existing products quickly Respond to customer needs

Competing on Speed Fast moves Fast adaptations Tight linkages

Product / Service Design Strategies

Operations Strategy: Products and Services Make-to-order products and services are made to customer specifications after an order has been received Make-to-stock products and services are made in anticipation of demand Assemble-to-order products and services add options according to customer specifications

Strategy and Decisions Corporate strategy Market analysis Competitive priorities Services Manufacturing Standardized services Assemble-to-order Customized services Make-to-stock Make-to-order Operations strategy This slide shows the classic operations strategies in a larger font to facilitate discussion. 85

Market Orientation and Customer Experienced Lead Time

Process Strategy Matrix

Product-Process Matrix Source: Robert Hayes and Steven Wheelwright, Restoring the Competitive Edge: Competing Through Manufacturing (New York: John Wiley & Sons, 1984), p. 209

More Standardized – Higher Volume Continuous Production A paper manufacturer produces a continuous sheet paper from wood pulp slurry, which is mixed, pressed, dried, and wound onto reels. More Standardized – Higher Volume Mass Production Here in a clean room a worker performs quality checks on a computer assembly line. Batch Production At Martin Guitars bindings on the guitar frame are installed by hand and are wrapped with a cloth webbing until glue is dried. Project Construction of the aircraft carrier USS Nimitz was a huge project that took almost 10 years to complete.

Service-Process Matrix Source: Adapted from Roger Schmenner, “How Can Service Businesses Survive and Prosper?” Sloan Management Review 27(3):29

Less Customized-Less Labor Intensive Service Factory Electricity is a commodity available continuously to customers. Less Customized-Less Labor Intensive Mass Service A retail store provides a standard array of products from which customers may choose. Service Shop Although a lecture may be prepared in advance, its delivery is affected by students in each class. Professional Service A doctor provides personal service to each patient based on extensive training in medicine.

The ‘efficient frontier’ view A X C D Cost efficiency Variety B The new ‘efficient frontier’ B1 The ‘efficient frontier’ Variety A C D B X Cost efficiency

Deploying Strategy

Policy Deployment Hoshin Kanri Focuses employees on common goals & priorities Translates strategy into measurable objectives Aligns day-to-day decisions with strategic plan

Balanced Scorecard Finance — How should we look to our shareholders? Customer — How should we look to our customers? Processes — At which business processes must we excel? Learning and Growing — How will we sustain our ability to change and improve?

Key Performance Indicators Source: Robert Kaplan and David Norton, Strategy Maps: Converting Intangible Assets into Tangible Outcomes (Boston: Harvard Business School Press, 2004), Figure 3-2, p. 67

Strategic Decisions in OM

Operations Strategy: Capacity and Facility Capacity strategic decisions include: When, how much, and in what form to alter capacity Facility strategic decisions include: whether demand should be met with a few large facilities or with several smaller ones whether facilities should focus on serving certain geographic regions, product lines, or customers facility location can also be a strategic decision

Operations Strategy: Human Resources What is skill levels and degree of autonomy required to operate production system? What are training requirements and selection criteria? What are policies on performance evaluations, compensation, and incentives? Will workers be salaried, paid an hourly rate, or paid a piece rate? Will profit sharing be allowed, and if so, on what criteria?

Operations Strategy: Human Resources Will workers perform individual tasks or work in teams? Will they have supervisors or work in self-managed work groups? How many levels of management will be required? Will extensive worker training be necessary? Should workforce be cross-trained? What efforts will be made in terms of retention?

Operations Strategy: Quality What is target level of quality for our products and services? How will it be measured? How will employees be involved with quality? What will be the responsibilities of the quality department?

Operations Strategy: Quality (cont.) What types of systems will be set up to ensure quality? How will quality awareness be maintained? How will quality efforts be evaluated? How will customer perceptions of quality be determined? How will decisions in other functional areas affect quality?

Operations Strategy: Sourcing Vertical integration degree to which a firm produces parts that go into its products Strategic Decisions How much of work should be done outside the firm? On what basis should particular items be made in-house? When should items be outsourced? How should suppliers be selected?

Operations Strategy: Sourcing (cont.) What type of relationship should be maintained with suppliers? What is expected from suppliers? How many suppliers should be used? How can quality and dependability of suppliers be ensured? How can suppliers be encouraged to collaborate?

Operations Strategy: Operating Systems How will operating systems execute strategic decisions? How to align information technology and operations strategic goals? How information technology supports both customer and worker demands for rapid access, storage, and retrieval of information? How information technology support decisions making process related to inventory levels, scheduling priorities, and reward systems?

Changing Corporation Characteristic Organization Focus Style Source: John Byrne, “Management by Web,” Business Week (August 28, 2000), p. 87 by special permission, copyright 2000 by The McGraw-Hill Companies, Inc. Characteristic 20th-Century Corporation 21st-Century Organization Focus Style Source of strength Structure Resources Leadership Workers Job expectations Pyramid Internal Structures Stability Self-sufficiency Physical assets Dogmatic Employees Security Web External Flexible Change Interdependencies Information Inspirational Free agents Personal growth

Changing Corporation Characteristic 20th-Century Corporation 21st-Century Operations Products Reach Financials Inventories Strategy Motivation Improvements Quality Vertical integration Mass production Domestic Quarterly Months Top-down To compete Incremental Affordable best Virtual integration Mass customization Global Real-time Hours Bottom-up To build Revolutionary No compromise