Operations Management Operations Strategy for Competitive Advantage Chapter 2

Outline • Global Company Profile: Komatsu • Identifying Missions and Strategies • Mission • Strategy • Achieving Competitive Advantage Through Operations • Competing on Differentiation • Competing on Cost • Competing on Response © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Outline - continued • Ten Strategic OM decisions • Issues in Operations Strategy • Research • Preconditions • Dynamics • Strategy Development and Implementation • Identify Critical Success Factors • Build and Staff the Organization • Integrate OM with Other Activities © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Learning Objectives When you complete this chapter, you should be able to : • Identify or Define: • Mission • Strategy • Ten Decisions of OM • Describe or Explain: • Specific approaches used by OM to achieve strategic concepts • Differentiation • Low Cost • Response © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Komatsu Strategies • 1960s - licensed design and technology from others; improved quality • 1970s - became global enterprise and built export markets aided by increasing value of yen • 1980s - joint ventures with Dresser, and manufacturing outside Japan • 1990s - used the latest technology to improve quality and drive down costs; focused on electronic engine controls • 2000s - increased European presence through ownership and joint ventures © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Komatsu Strategies Each strategy established in light of: • threats and opportunities in the environment • strengths and weaknesses of the organization (related to environment) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Mission - where are you going? • Organization’s purpose for being • Provides boundaries & focus • Answers ‘How can we satisfy people’s needs?’ • Expressed in published statement © 1995 Corel Corp. Mission © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Sample Mission - Circle K As a service company, our mission is to: Satisfy our customers’ immediate needs and wants by providing them with a wide variety of goods and services at multiple locations. © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Sample Mission - Merck The mission of Merck is to provide society with superior products and services - innovations and solutions that improve the quality of life and satisfy customer needs - to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Action plan to achieve mission • Shows how mission will be achieved • Company has a business strategy • Functional areas have strategies © 1995 Corel Corp. Strategy © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Company Mission Business Strategy Functional Area Strategies Functional Area Marketing Operations Fin./Acct. Decisions Decisions Decisions Strategy Process © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Competing on Differentiation • Uniqueness - can go beyond both the physical characteristics and service attributes to encompass everything that impacts customer’s perception of value © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

OM’s Contribution to Strategy Operations Decisions Specific Strategy Used Competitive Advantage Examples Quality Product Process Location Layout Human Resource Supply Chain Inventory Scheduling Maintenance FLEXIBILITY Sony’s constant innovation of new products Design Compaq Computer’s ability to follow the PC market Volume Southwest Airlines No-frills service LOW COST DELIVERY Pizza Hut’s five-minute guarantee at lunchtime Speed Differentiation (Better) Dependability Federal Express’s “absolutely, positively on time” QUALITY Response (Faster) Conformance Motorola’s automotive products ignition systems Cost leadership (Cheaper) Motorola’s pagers Performance IBM’s after-sale service on mainframe computers AFTER-SALE SERVICE Fidelity Security’s broad line of mutual funds BROAD PRODUCT LINE © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

10 Decision Areas of OM • Goods & service design • Quality • Process & capacity design • Location selection • Layout design • Human resource and job design • Supply-chain management • Inventory • Scheduling • Maintenance © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

High Moderate Variety of Products Low Low Moderate High Volume Process Design Customization at high Volume Process-focused Job Shops (Print shop, emergency room , machine shop, fine dining Mass Customization (Dell Computer’s PC) Repetitive (modular) focus Assembly line (Cars, appliances, TVs, fast-food restaurants) Product-focused Continuous (steel, beer, paper, bread) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Characteristics of High ROI Firms • High quality product • High capacity utilization • High operating effectiveness • Low investment intensity • Low direct cost per unit From the PIMS study of the Strategic Planning Institute © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Strategic Options Managers Use to Gain Competitive Advantage • 28% - Operations Management • 18% - Marketing/distribution • 17% - Momentum/name recognition • 16% - Quality/service • 14% - Good management • 4% - Financial resources • 3% - Other © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Strategic Options Managers Use to Gain Competitive Advantage • 28% Operations Management • Low- cost product • Product-line breadth • Technical superiority • Product characteristics/differentiation • Continuing product innovation • Low-price/high-value offerings • Efficient, flexible operations adaptable to consumers • Engineering research development • Location • Scheduling © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Strategic Options Managers Use to Gain Competitive Advantage - continued • 18% Marketing/Distribution • 17% Momentum/name recognition • 16% Quality/service • 14% Good management • 4% Financial resources • 3% Other © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Preconditions -To Implement a Strategy One must understand: • Strengths & weaknesses of competitors and new entrants into the market • Current and prospective environmental, legal, and economic issues • The notion of product life cycle • Resources available with the firm and within the OM function • Integration of OM strategy with company strategy and with other functions. © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Decline Maturity Introduction Growth Practical to change price or quality image Strengthen niche Best period to increase market share R&D product engineering critical Cost control critical Poor time to change image, price, or quality Competitive costs become critical Defend market position Fax machines Drive-thru restaurants 3 1/2” Floppy disks Company Strategy/Issues CD-ROM Sales Station wagons Internet Color copiers HDTV Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity Standardization Less rapid product changes - more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focused Enhance distribution OM Strategy/Issues Strategy and Issues During a Product’s Life © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Strategy & Issues During Product Life Introduction Best period to increase market share R&D engineering are critical Product design and development are critical Frequent product and process design changes Over-capacity Short production runs High skilled-labor content High production costs Limited number of models Utmost attentions to quality Quick elimination of market-revealed design defects • Company Strategy & Issues • OM Strategy & Issues © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Company Strategy & Issues OM Strategy & Issues Strategy & Issues During Product Life Growth Practical to change prices or quality image Marketing is critical Strengthen niche Forecasting is critical Product and process reliability Competitive product improvements and options Shift toward product oriented Enhance distribution © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Company Strategy & Issues OM Strategy & Issues Strategy & Issues During Product Life Maturity Poor time to increase market share Competitive costs become critical Poor time to change price, image, or quality Defend position via fresh promotional and distribution approaches Standardization Less rapid product changes and more minor annual model changes Optimum capacity Increasing stability of manufacturing process Lower labor skills Long production runs Attention to product improvement and cost cutting Re-examination of necessity of design compromises © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Company Strategy & Issues OM Strategy & Issues Strategy & Issues During Product Life Decline Cost control critical to market share Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning Good margin Reduce capacity © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

SWOT Analysis to Strategy Formulation Mission Internal External S trengths O pportunities Strategy Internal External W eaknesses T hreats Competitive Advantage © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Production/Operations Finance/Accounting Leverage Cost of capital Working capital Receivables Payables Financial control Lines of credit Marketing Service Distribution Promotion Channels of distribution Product positioning (image, functions) Identifying Critical Success Factors Decisions Sample Options Product Customized, or standardized Quality Define customer expectations and how to achieve them Process Facility size, technology Location Near supplier or customer Layout Work cells or assembly line Human resource Specialized or enriched jobs Supply chain Single or multiple source suppliers Inventory When to reorder, how much to keep on hand Schedule Stable or fluctuating productions rate Maintenance Repair as required or preventive maintenance © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Critical Success FactorsMicrosoft & Compaq • They focus on one business • They are global • Their senior management is actively involved in defining and improving the product development process • They recruit and retain the top people in their fields. • They understand that speed to market reinforces product quality © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Courteous, but limited passenger service Lean, productive employees Competitive Advantage: Low Cost Short haul, point-to-point routes, often to secondary airports High aircraft utilization Frequent, reliable schedules Standardized fleet of Boeing 357 aircraft Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage Courteous, but limited passenger service No seat assignments No baggage transfers Automated ticketing machines No meals © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage Lower gate costs at secondary airports High number of flights, reduces employee idle time between flights Short haul, point-to-point routes, often to secondary airports © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage High number of flights reduces employee idle time between flights Saturate a city with flights flowering administrative costs per passenger for that city Frequent, reliable schedules © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Operations Management Operations Strategy for Competitive Advantage Chapter 2