Operations Strategy

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Topic-3

• Operations Strategy

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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?)

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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
• marketplace?

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Competitive Priorities

• Capabilities
• current
• needed
• planned

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• 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.

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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.

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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

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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

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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

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Competitive Priorities

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

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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

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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

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Wendys McDonalds
Mission Purpose

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

• A higher quality, 100 fresh beef burger (and
  associated products) sold to an older (over 25)
  market on an as you want it basis.

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Wendys Operations
McDonalds Operations
Made to order Made to stock
Customized Standardized
Non-automated Automated More technology
Worker packed assembly line Batch assembly line
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Wendys Operations
McDonalds Operations
Customization important single lines Throughput speed important
Moderate job specialization More job specialization
Emphasizes quality customization Emphasis efficiency consistency, economy
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TI vs. HPDifferentiation Hand Calculators
Texas instruments TI Hewlett- Packard HP
Product Lower priced standardized product Higher priced performance- oriented
Size of potential market Very large Small
Engineering More process and industrial engineers emphasis is in efficiency of manufacturing More product engineers- emphasis is in perfecting new performance features
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TI vs. HP (Cont.)
Texas Instruments TI Hewlett Packard HP
Vertical integration makes more of components Purchases more of components
Manufacturing process Assembly line Batch production bench assembly
Production employees Lower skilled assemblers Higher skilled assemblers
Distribution Wide system- large number of different retail outlets Narrow focus specialized outlets
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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.

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TIMEX Mass Production

• Single, simple product focus
• Simple process technology
• Unskilled labor
• Economies of Scale
• Product durability stressed
• High degree of standardization

Swiss Timex
125 parts 98 parts
6 plates 2 plates
31 screws 6 screws
100 steps 6 steps
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TIMEX Mass Marketing

• Mass distribution through drug stores
• Changed consumers views towards watches No
  longer a heirloom, but functional
• T.V. Ads used to reach masses
• Now consumer challenged that relationship

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TIMEX (follow-up story)

• In the 1960s 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 1950s. 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.

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Operations Strategy Model
Structure Capacity Facility Technology
Competitive Priorities Cost Quality Flexibilit
y Delivery
Infrastructure Workforce Quality Production
Planning Organization
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Time line for Operations Strategies
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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.)

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• 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.

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Characteristics of a good operations strategy

• 3. Are operations decisions internally
  consistent?
• 4. Are operations decisions compatible with and
  supportive if the firms strategy?
• 5. Is the operation unit focused on a limited
  dimensions?

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Strategic vs Tactical Decision
1.MGT level 2.Time horizon 3.Importance 4. Uncertainty 5.Problem nature Strategic Top Long range Large impact (across organization) High unstructured Tactical Middle or low Short range Small impact (within functional unit) Low structured
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Strategic vs Tactical Decision (II)
6.Information Needs 7.Correction after implementation Strategic Qualitative External Related to future Difficult and expensive Tactical Quantitative Internal Related to past Relatively easy and inexpensive
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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
• planning)

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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
• control

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Strategy Formulation Process

• Analysis of business environment
• External factors
• customers/competitors/market segment
  social/political/technological/
• Internal factors Finance/marketing/supplier/c
  apacity of production/work force/

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Strategy Formulation Process

• Specification of overall business strategy
• How firms capabilities best match current
  (potential) market opportunities?
• Determination of operations performance criteria
• Price leader/quality/reliability/customization
  
• /

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Strategy Formulation Process

• Strategic operations decisions
• Capacity planning/facility location
  selection/span of process facility size and
  layout/product and process design/

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Products 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.

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Stages of a Products Life Cycle
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National competitive advantages

• 1.Factor conditions a nations 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

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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.)

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National competitive advantages

• 5.Chance and opportunity (e.g. wars, oil crisis,
  etc.)
• 6.Government support (e.g. favorable policies
  and regulations)

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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.

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International Companies

• Worlds 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

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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)

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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)

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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.

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Cont.
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Ranking of Preferred Competitive Strategies
North America, Japan, and Europe
Competitive Weapon North America Japan Europe
Consistent quality 1 3 1
High product performance 2 6 2
On-time deliveries 3 4 3
Low price 4 1 5
Fast delivery 5 7 4
Rapid design changes 6 2 6
After-sales service 7 8 7
Rapid volume changes 8 5 8

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

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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

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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)
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E-Shoe Retailer - Zappos

• Amazonof Shoe Retail

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Welcome to Zappos

• http//www.youtube.com/watch?vPqAXLbV9gGU
• http//www.youtube.com/watch?v0mBxK6eXLrQ
• http//www.youtube.com/watch?vuxBWfqDAQkg
• http//www.youtube.com/watch?vtFyW5s_7ZWc

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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.

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Zappos 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

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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 Swinmurns 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.

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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.

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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

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Problems

• 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
  Zapposs performance in both hardware and
  software.

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Hardware

• 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.

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Software

• Free return
• No successful examples before in E-shoe retailing
  because its 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.

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As A results

• Greatly enhanced customers satisfaction and
  loyalty
• Since 2000 to 2007, Zapposs 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.

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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.

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Employee Training

• Zappos has its own special method to look for
  those qualified employees.
• Professional 4-week training program, make
  employees aware of companys 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.

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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?