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Topic-3. Operations Strategy. Operations Strategy. Definition: Strategy is a set of plans and policies by which a company whishes to gain advantages over its competitors in the marketplace. Three levels of strategy:

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topic 3


Operations Strategy

operations strategy
Operations Strategy
  • Definition: Strategy is a set of plans and policies by which a company whishes to gain advantages over its competitors in the marketplace.
  • Three levels of strategy:

1.Corporate Strategy: overall plan of company— Company level. (What Market segment do we want to go?)

operations strategy1
Operations Strategy
  • 2. Business Strategy: General plan of Strategy Business Unit (SBU) (How do we compete in the selected market?)
  • 3. Functional Strategy: Specific Plan of a functional unit.
  • Operations strategy:

How does the production system provide

the desired competitive advantages in



Corporate strategy

  • environmental scanning
  • core competencies
  • core processes
  • global strategies
  • Market analysis
  • segmentation
  • needs analysis
  • Competitive priorities
  • cost
  • quality
  • time
  • flexibility
  • New Service/
  • Product Design
  • design
  • analysis
  • development
  • full launch
  • Functional area strategies
  • finance • operations
  • marketing • others

Competitive Priorities

  • Capabilities
  • current
  • needed
  • planned

Operational effectiveness is the ability to perform similar operations activities better than competitors.

  • It is very difficult for a company to compete successfully in the long run based just on operational effectiveness.
  • A firm must also determine how operational effectiveness can be used to achieve a sustainable competitive advantage.
  • An effective competitive strategy is critical.
operations performance criteria
Operations performance criteria
  • 1. Productivity
  • 2.Quality
  • 3.Flexiblity
  • 4.Reliability
  • 5.Low price/cost
  • 6.Consistency
  • 7.Delivery speed
  • 8.Delivery reliability
  • 9.Stisfaction of workers
  • 10. ………………………
order winning criteria
Order-winning criteria
  • 1.Cost leader
  • 2.Unique feature/value of products/service
  • 3.Variety of products/service
  • 4.High quality
  • 5.New product leader
  • 6.Flexibility to market changes
  • 7.Customerization

Competitive Priorities

  • Low Production Costs
    • Definition
    • Unit cost (labor, material, and overhead) of each product/service
    • Some Ways of Creating
      • Redesign of product/service
      • New technology
      • Increase in production rates
      • Reduction of scrap/waste
      • Reduction of inventory

Competitive Priorities

  • Delivery Performance
    • Definition
    • a) Fast delivery b) On-time delivery
    • Some Ways of Creating
    • a) larger finished-goods inventory

b) faster production rates

c) quicker shipping methods

d) more-realistic promises

e) better control of production of orders

f) better information systems


Competitive Priorities

  • High-Quality Products/Services
    • Definition
    • Customers’ perception of degree ofexcellence exhibited by products/services
    • Some Ways of Creating
      • Improve product/service’s
      • Appearance
      • Performance and function
      • Wear, endurance ability
      • After-sales service

Competitive Priorities

  • Service and Flexibility
    • Definition
    • Ability to quickly change production to other products/services. Customer responsiveness.
    • Some Ways of Creating
      • Change in type of processes used
      • Use of advanced technologies
      • Reduction in WIP through lean manufacturing
      • Increase in capacity

No Single Best Strategy

  • Start-up and Small Manufacturers
    • Usually prefer positioning strategies with:
    • Custom products
    • Job shop or batch Shop focused production
    • Produce-to-order policies
    • -- more flexible and require less capital.

-- can Successfully compete with large corporations by:

    • Carving out a specialty niche
    • Emphasizing close, personal customer service
    • Developing a loyal customer base
wendy s mcdonald s
A higher quality, 100% fresh beef burger (and associated products) sold to an older (over 25) market on an “as you want it basis”.

A uniform, economical, mass produced burger (and associated products) sold to younger market on a standardized basis.

Wendy’s McDonald’s

Mission & Purpose

wendy s operations
Wendy’s Operations

McDonald’s Operations

wendy s operations1
Wendy’s Operations

McDonald’s Operations

timex its early success
TIMEX –(Its early Success)

Not taken seriously at first by U.S. and Swiss watch manufacturers, Timex introduced its line of inexpensive watches in 1950. By 1970, half of the watches sold in the U.S. (and lots of foreign countries) were made by Timex. The success of Timex depended upon a careful matching of production and marketing strategies. The Timex formula through the early years: Mass Production and Mass Marketing.

timex mass production
TIMEX: Mass Production
  • Single, simple product focus
  • Simple process technology
  • Unskilled labor
  • Economies of Scale
  • Product durability stressed
  • High degree of standardization
timex mass marketing
TIMEX: Mass Marketing
  • Mass distribution through drug stores
  • Changed consumer’s views towards watches: No longer a “heirloom”, but functional
  • T.V. Ads used to reach masses
  • Now consumer challenged that relationship
timex follow up story
TIMEX: (follow-up story)
  • In the 1960’s Timex upgraded its product lines partly as a competitive weapon and partly as an attempt to expand its market. The plan: moved to 17 and 21 jeweled watches, electronic watches, multiple technologies, expanded retail outlets. Timex expanded its focus from the single product, single technology company it was in 1950’s. Pros: Upper end of their line made lower portion of line look good. Cons: Image problem, customers confused. Increased competition. Multi product line increased inventory holdings, operating costs.
operations strategy model
Operations Strategy Model





Competitive Priorities:








Production Planning


characteristics of a good operations strategy
Characteristics of a good operations strategy
  • 1. Is the operations adaptive and flexible?

(Ready for changing in operations when necessary?)

  • 2. Dose the operations unit provide a real competitive advantage?

(An advantage in facility may not be

an advantage in the marketplace.)

“Thanks, but I really have no use for a Stairmaster.”

“A unique competence may not give you a real competitive advantage”- a lesson for Operations managers.

characteristics of a good operations strategy1
Characteristics of a good operations strategy
  • 3. Are operations decisions internally consistent?
  • 4. Are operations decisions compatible with and supportive if the firm’s strategy?
  • 5. Is the operation unit focused on a limited dimensions?
examples of strategic decisions in operations management
Examples of strategic decisions in operations management
  • 1.Product and process design
  • 2.Technology selection
  • 3.Inventory level determination
  • 4.Work force size and composition
  • 5.Facility location
  • 6.Facility size and layout (capacity


examples of strategic decisions in operations management ii
Examples of strategic decisions in operations management (II)
  • 7.Integration degree
  • 8.span of process (e.g. make of buy decision)
  • 9. quality assurance planning
  • 10. organizational structure
  • 11. management information system

design for production planning and


strategy formulation process
Strategy Formulation Process
  • Analysis of business environment

External factors:

customers/competitors/market segment social/political/technological/………

Internal factors: Finance/marketing/supplier/capacity of production/work force/………

strategy formulation process1
Strategy Formulation Process
  • Specification of overall business strategy

How firm’s capabilities best match current (potential) market opportunities?

  • Determination of operations performance criteria

Price leader/quality/reliability/customization


strategy formulation process2
Strategy Formulation Process
  • Strategic operations decisions

Capacity planning/facility location selection/span of process facility size and layout/product and process design/………


Product’s Life Cycle

  • Introduction- Sales begin, production and marketing are developing, profits are negative.
  • Growth - sales grow dramatically, marketing efforts intensify, capacity is expanded, profits begin.
  • Maturity - production focuses on high-volume, efficiency, low costs; marketing focuses on competitive sales promotion; profits are at peak.
  • Decline - declining sales and profit; product might be dropped or replaced.




Fax Machine

Cell Phone

Video Recorder

Internet Radio

Color Copier

CD Player


Introduction Growth Maturity Decline

Stages of a Product’s Life Cycle

national competitive advantages
National competitive advantages
  • 1.Factor conditions: a nation’s ability to turn its basic resources into a specialized advantage.
  • 2.Demand conditions: number and sophistication of domestic customers, and the strength of media exposure to customers.
  • 3.Related and supporting industries: High integration and corporation within the industry and among related industries. (e.g.
  • A supplier industrial “cluster” or “chain”
national competitive advantages1
National competitive advantages
  • 4. Company strategy, structure and rivalry: An effective strategy with matching organizational structure and strong domestic competition.

(combination of all 4 points above is desirable for a nation to gain competitive advantages.)

national competitive advantages2
National competitive advantages
  • 5.Chance and opportunity: (e.g. wars, oil crisis, etc.)
  • 6.Government support: (e.g. favorable policies and regulations)

International Companies

  • International companies are those whose scope of operations spans the globe as they buy, produce, and sell.
  • International firms search out opportunities for profits relatively unencumbered by national boundaries.
  • Operations managers must coordinate geopraphically dispersed operations.

International Companies

  • World’s Largest Corporations
    • 1. General Motors US

2. Wal-Mart Stores US

3. Exxon Mobil US

4. Ford Motor US

5. DaimlerChrysler Germany

6. Mitsui Japan

7. Mitsubishi Japan

8. Toyota Japan

9. General Electric US

10. Itochu Japan

global operations strategy
Global operations strategy

Between two extremes:

  • Domestic operations with exporting orientation (e.g. Diamond cutting)
  • Localized operations by licensing & joint ventures: (e.g. fast food industry)
  • ………………………
global operations strategy1
Global operations strategy
  • Multi-national operations through

subsidiary structure.

(e.g. Professional service. Public

accounting, etc.)

  • Global operations with cross-nation integrated manufacturing

(e.g. Auto and electronics industries)

global operations strategy2
Global operations strategy
  • Two important strategy determinants:

1.capacity rationalization: required by the scale and efficiency of operations, productivity oriented.

2.Localization of operations: required by different local technical standards, demand specifications and local

governmental regulations.

ranking of preferred competitive strategies north america japan and europe
Ranking of Preferred Competitive Strategies: North America, Japan, and Europe

Note: 1 is the highest ranking and 8 is the lowest

strategic alliance
Strategic alliance
  • Strategic alliances are joint ventures among international companies to exploit global business opportunities
  • Alliances are often motivated by

1.Product or production technology

2.Market access

3.Production capability

4.pooling of capital


Strategic Alliances

Kia might help sell

and market GM cars

in South Korea

General Motors (US) &

Kia Motor Corp. (S.K.)

Manufacture 100,000

vehicles annually

near Moscow

Renault (France) &

City of Moscow

Forming Texas-based

Sino Swearingen

Aircraft Co.

Sino Aerospace Invest-

ment Corp. (Taiwan) &

Swearingen Aircraft (US)

e shoe retailer zappos

E-Shoe Retailer - Zappos

”Amazon”of Shoe Retail

welcome to zappos
Welcome to Zappos
about zappos
About Zappos
  • The annual sales of Zappos was $800 million, over ¼ of E-shoe retail market, whose market size is over $3 billions
  • It is so famous and popular that it is known as “Amazon” in this industry, which is the leader of E-shopping business.
  • Diversified the products, such sunglasses and purse, etc.
  • Open the first direct store in Las Vegas in 2007
  • Aimed to reach a $1 billion sales in 2010.
zappo s core value
Zappo’s Core Value
  • Deliver WOW Through Service
  • Embrace and Drive Change
  • Create Fun and A Little Weirdness
  • Be Adventurous, Creative, and Open-Minded
  • Pursue Growth and Learning
  • Build Open and Honest Relationships With Communication
  • Build a Positive Team and Family Spirit
  • Do More With Less
  • Be Passionate and Determined
  • Be Humble
history of zappos
History of Zappos
  • 1999, Xie met Nick Swinmurn and discussed the possibility of running E-Shoe Store.
    • E-shopping Market size of $40 billions, and mail-order exceeds $2 billions
  • Xie first invest 1 million on Swinmurn’s online shoe store, Shoe Site, which is changed name to Zappos soon. (The name Zappos is derived from the Spanish word zapatos, meaning shoes.)
  • Later, another 10 million investment is added Zappos by Xie, who became the CEO of Zappos in 2000.
new products on zappos
New Products on Zappos
  • Zappos has expanded from shoes to handbags and purses, and has launched a second line of high-end shoes called Zappos Couture.
the founder of zappos
The Founder of Zappos
  • Founder: Jiahua Xie, A Chinese Guy born in Illinois:
    • Graduated from Harvard University
    • Major in Computer Technology, and won couple of champions
    • Starts running a pizza business while in school
    • Made his first bucket of gold of founding LinkEchange, an internet advertising company
  • Difficulties at the beginning:
    • Insufficient Orders
    • 1/10 of orders are unavailable, either out of stock or delivered wrong shoes
    • Kept on losing money and faced the threat of bankrupt
    • Zappos did "almost nothing" in sales for 1999

Xie took certain of actions to improve the Zappos’s performance in both hardware and software.

  • To help customers easy shopping: every pair of shoes in inventory of total 58,000 pairs is pictured at 8 different angles.
  • To ensure fast delivery, Zappos located its warehouses next to UPS’ airports and make them work 24/7.
  • Free return
    • No successful examples before in E-shoe retailing because it’s too easy to buy the wrong shoes.
    • Need to relief customers’ discomposure as well as minimize the cost.
  • Xie designed E-mail system for Zappos to automatically reply custpomers’ e-mail of return requests.
  • Zaoppor paid $100 millions as a shipping cost for all returns and redeliveries.
as a results
As A results
  • Greatly enhanced customers’ satisfaction and loyalty:
    • Since 2000 to 2007, Zappos’s sales increase dramatically in past 7 years
    • Grossed over $800 million in merchandise sales in 2007, and is projecting over $1 billion in 2008
    • Zappos serve for total customers of 5 million.
    • 60% of total customers returned customers
    • Other 25% use word of mouth to bring in new customers to Zappos
    • $15 million venture capital is invested in.
high requirements of employee
High Requirements of Employee
  • Zappos manage professional skills of call in service, and try to create free and easy shopping atmosphere to customers.
  • Thus, customer representatives are required to perform cleverly and humorously in couple of hours.
employee training
Employee Training
  • Zappos has its own special method to look for those qualified employees.
    • Professional 4-week training program, make employees aware of company’s strategy, culture, and customer devotion.
    • After the first week of training program, “deal no deal” time – offer $1000 to ask trainees to quit. About 10% new employees choose to deal.
      • The idea here is that Zappos take initial cost to instead of long term investment, and try to identify the matchingness between company value and employees’ individual value.
assignment questions
Assignment Questions?
  • Q-1: What are key success factors for Zappos?
  • Q-2: What are possible main challenges facing the company?
  • Q-3: What are lessons – one should learn from Zappos successful story?