Chapter 2 :
Operation
Strategy
Learning Objectives:
After this chapter, you should be able to:
2.1 Explain how organizations seek to gain competitive advantage
2.2 Explain approaches for understanding customer wants and needs
2.3 Describe how customers evaluate goods and services
2.4 Explain the five key competitive priorities
2.5 Explain the role of OM sustainability and operations in strategic planning.
2.6 Describe hill’s framework for operations strategy
2 | Learning Objectives
2-1
Gaining Competitive Advantage
Competitive Advantage
denotes a firm’s ability to achieve market and financial superiority
over its competitors.
2-1 | Gaining Competitive Advantage
Creating competitive advantage requires fundamental
understanding of two things:
1. Management must understand customer needs and expectations
and how the value chain can best meet these
2. Management must build and leverage operational capabilities to
support desired competitive priorities.
2-1 | Gaining Competitive Advantage
Organizations must have many
strategic choices in designing and
operating their domestic and
global value chains.
These choices must be driven by
current and emerging customer
needs and expectations.
2-1 | Gaining Competitive Advantage
2-2
Understanding Customer Wants and Needs
Fundamental purpose of an organization is to provide goods and
services of value to customers.
It is important to first understand customer desires and also to
understand how customers evaluate goods and services
2-2 | Understanding Customer Wants and Needs
Customers must be segmented into
several natural groups, each with unique
wants and needs.
Segments must be based on:
oBuying behavior
oGeography
oDemographics
oSales volume
oProfitability
oExpected level of service
2-2 | Understanding Customer Wants and Needs
By understanding differences among such segment, a
company can design the most appropriate customer
benefits packages, competitive strategies, and
processes to create the goods and services to meet
the unique needs of each segment.
2-2 | Understanding Customer Wants and Needs
To correctly identify what customer expect requires being “close to customers”.
Ways to do this:
▪ Having employees visit and talk to customers
▪ Having managers talk to customers
▪ Doing formal marketing research
Example: Marriot Corporation
They require their top managers to annually work a full day or more in
the hotels as bellhops, waiters, bartenders, front-desk service providers, and
so on, to gain true understanding of customer wants and needs, and the
types of issues that their hotel service providers must face in serving
customers
2-2 | Understanding Customer Wants and Needs
Order qualifiers Order winner
Basic customer expectations are generally Are goods and services features and
considered the minimum performance level performance characteristics that differentiate
required to stay in business. on customer benefit package from another and
win the customer’s business.
Example:
Example:
a) Radio and driver-side air bag are
generally expected by all customer for an a) Collision avoidance system or voice
automobile activated music system on automobile
b) A highly competitive pizza business - b) Papa John’s Pizza focused on “better
efficient delivery ingredients, better pizza”
In order to differentiate the business from the
competitors
2-2 | Understanding Customer Wants and Needs
2-3
Evaluating Goods and Services
Customers use three types of attributes in
evaluating the quality of goods and services:
1. Search
2. Experience
3. Credence
2-3 | Evaluating Goods and Services
Three types of attributes in evaluating the quality of goods and services
Search Attributes Experience Attributes Credence Attributes
Those that a customer can Those that can be discerned Any aspects of a good or service
determine prior to only after purchasing or that the customer must believe
purchasing the goods during consumption or use. in but cannot personally evaluate
and/or services. even after purchase and
consumption
❑ Color ❑ Fit ❑ Friendliness ❑ Fun ❑ Expertise of tax advisor
❑ Prices ❑ Feel ❑ Taste ❑ Customer surgeon ❑ Accuracy of tax
❑ Freshness ❑ Hardness ❑ Wearability satisfaction ❑ Expertise of preparation
❑ Style ❑ Smell ❑ Safety mechanic software
❑ Knowledge of a
2-3 | Evaluating Goods and Services
Exhibit 2.1 | How Customers Evaluate Goods and Services
This model suggests that goods are easier to evaluate than services and that goods are high in search qualities,
whereas services are high in experience and credence attributes.
2-3 | Evaluating Goods and Services
Few ways on how customers evaluate services in ways that are often
different from good along with significant issues that affect operations:
❖ Customers seek and rely more on information from personal sources
than from non-personal sources when evaluating services prior to
purchase.
❖ Customers perceive greater risks when buying services than when
buying goods.
2-3 | Evaluating Goods and Services
2-4
Competitive Priorities
Competitive Priorities – represents the strategic
emphasis that a firm places on certain
performance measures and operational capabilities
within a value chain
Five key competitive priorities:
1. Cost
2. Quality
3. Time Vital to success
4. Flexibility
5. innovation
2-4 | Competitive Priorities
Cost
Some firms achieve their competitive advantage through low prices.
They do this through high volumes and the efficient design and operation of their supply
chain
Low prices cannot be achieved without strict attention to cost and the design and
management of operations
- they gain competitive advantage by establishing themselves as the low-cost leader in
an industry
General - Discovered that design determines 75% of its manufacturing costs
Electric - Through good design and by chipping away at costs, operations managers help to
support a firm’s strategy to be a low-price leader.
2-4a | Competitive Priorities - Cost
Cost
Low cost can result from high productivity and high-capacity utilization.
Improvements in quality to improvements in productivity lower cost
A Strategy of continuous improvements is essential to achieve a low-cost
competitive advantage
2-4a | Competitive Priorities - Cost
Quality
Research have found that:
✓ Business offering premium-quality goods usually have large market shares and were
early entrants intro their markets.
✓ Quality is positively and significantly related to a higher return on investment for
almost all kinds of situations.
✓ A strategy of quality improvement usually leads to increased market share, but at a
cost in terms of reduced short-run profitability.
✓ Producers of high-quality goods can usually charge premium prices.
2-4b | Competitive Priorities - Quality
Exhibit 2.2 | Interlinking Model of Quality and Profitability
— The value of a good or service in the marketplace is influenced by the quality of its design.
— Improvements in performance, features, and reliability will differentiate the good or service from its
competitors, improve a firm’s quality reputation, and improve the perceived value of the customer benefit
package.
2-4b | Competitive Priorities - Quality
Time
— Time is perhaps the most important source of competitive advantage
— Speeding up processes in supply chains improves customer response.
— Time reduction can only be accomplished by streamlining and simplifying
processes to eliminate non-value-added steps such as rework and waiting
time
— Designing processes and using technology efficiently to improve speed and
time reliability are some of the most important activities for operations
managers
2-4c | Competitive Priorities - Time
Flexibility
— Flexibility is manifest in mass-customization strategies that are becoming
increasingly prevalent today
— Mass customization – being able to make whatever goods and services the
customer wants, at any volume, at any time for any body, and for a global
organization, from any place in the world
Examples:
▪ Sign tic company-uniquely designed for each customers
▪ Levi’s jeans – cut to exact measurements
▪ Motorola pagers – customized in different colors, size, shapes
▪ Modular furniture – configured to customer’s unique needs and taste
2-4d | Competitive Priorities - Flexibility
Flexibility
— Customer can configure to their unique needs and taste
— Customer involvement might occur at the design ( as in the case of
custom signs), fabrication (Levi’s jean), assembly (Motorola pagers), or
postproduction ( customer-assembled modular furniture) stages of value
chain.
Mass customization requires companies to align their activities around
differentiated customer segments and design goods, services, and operations
around flexibility.
2-4d | Competitive Priorities - Flexibility
Innovation
Innovation – the discovery and practical application or commercialization of a
device, method, or idea that differs existing norms.
Innovations in manufacturing equipment and management practices have allowed
organizations to become more efficient and better meet customer’s needs.
Example: Apple
These companies focus on outstanding product research, design, and development;
high product quality; and the ability to modify production facilities to produce new
products frequently
2-4e | Competitive Priorities - Innovation
Organizations generally make trade-offs among these competitive priorities
and focus their efforts along one or two key dimensions.
Example:
Amazon – competes primarily on time, cost, and flexibility
Apple- competes on quality and innovation
2-4 | Competitive Priorities
2-5
Om and Strategic Planning
The concept of strategy.
Pg 34-45
• The direction an organization takes and the
competitive priorities it choses and driven by its
strategy.
• Strategy is a pattern or plan that integrates an
What is organization’s major goal, policies, and action
sequence into a cohesive whole.
Strategy?
• A strategy is the approach by which an
organization seeks to develop the capabilities
required of achieving its competitive advantage.
Strategic Planning
CORPORATE LEVEL
is the process of determining long-term goals, (ORGANIZATIONAL)
policies, and plans for the organization. The
strategy is the result of a series hierarchical
decision about goals, directions, and BUSINESS LEVEL
resources. Most large organizations have (SBU)
three levels of strategy : corporate, business,
functional.
FUNCTIONAL LEVEL
(BUSINESS ACTIVITIES)
Corporate
Strategy
At the top level, corporate strategy is necessary to define the
business in which the corporation will participate and develop plans
for the acquisition and allocation of resources among those
businesses. The business in which the firm will participate are often
called strategic business units (SBUs) and are usually defined as
families of goods or services having similar characteristics or
methods of creation.
Business
Strategy
Second level strategy is generally called business
strategy and defines the focus for SBU’s. The major
decisions involve which markets to pursue and how best
to compete in those markets.
Functional
Strategy
is the third level of strategy, the means by which
business strategies are accomplished. A functional
strategy is the set of decisions that each functional area
(marketing, finance, operations, research and
development, engineering, etc.) develops to support its
particular business strategy.
2-5a
Operations
Strategy
Pg 34-45
Operations Strategy
• An operations strategy is the set of decisions across the value
chain that supports the implementation of higher-level business
strategies.
• It defines how an organization will execute its chosen business
strategies
EXAMPLE:
Progressive automobile insurance has developed a
competitive advantage around superior customer service.
To accomplish this, its operating decisions have included
on-the-spot claims processing at accident sites:
"Total LossConcierge" service to help customers with
unrepairable vehicles get a replacement vehicle
01
2 Types of Produce a well-defined set of
products in a fairly stable market
environment as a low-
Business cost leader.
Strategies for a
Manufacturer 02
Provide high product variety and
customization in a turbulent market
that requires innovative designs to
meet customer specific
requirements.
1 In the first situation, the firm would be best served by emphasizing
quality and cost reduction to make their make-to-stock strategy.
2
In the second situation, the firm would need to be able to operate
at different levels of production volume while also achieving high
quality and flexibility.
Product design would require constant innovation and shorter
development cycles.
2-5b
Sustainability
Operational Strategy
Pg 34-45
Environmental
Sustainability
Sustainability is defined in previous
chapters using three dimensions—
environmental, social, and economic
sustainability.
Economical Social
• Sustainability is an organizational strategy it is broader than a
competitive priority.
• Stakeholders such as the community, green advocacy groups and
the government drive environmental sustainability.
• Social sustainability is driven by ethics and human ideals of
protecting the planet and its people.
• Economic sustainability is driven by shareholders such as
pension funds and insurance companies.
EXAMPLE:
Companies such as Apple, Kaiser Parmanente, and
Nike view sustainability as a corporate strategy. A
majority of global consumers believe that it is their
responsibility to contribute to a better environment
and would pay more for brands that supports this
aim.
New Strategies for
Environmental Sustainability
• Creating better designs focus on ease of disassembly and lower cost for
refurbishing and recycling this might include modular designs that make it
easier to reuse parts than recycle them.
• Incorporating refurbishing and recycling activities into the manufacturer’s value
chain. As many as 130million phones are retired each year.
• Creating more secondary markets for refurbished phones.
• Developing a new process to collect and refurbish old phones
2-6a
Framework for
Operational Strategy
Pg 34-45
A useful framework for strategy development that ties corporate and marketing strategy to
operations strategy was proposed by Professor Terry Hill at Templeton College, Oxford University
2-6a
Operational Strategy at
McDonald's
Pg 34-45
Be the Best Employer
Be the best employer for our people in each
community around the world.
McDonald's vision is to be the world's
best quick-service restaurant Deliver Operational Excellence
experience. Being the best means
providing outstanding quality, service, Deliver operational excellence to our
customers in each of our restaurants.
cleanliness, and value, so that we
make every customer in every
restaurant smile. To achieve our vision,
we focus on three worldwide Achieve Enduring Profitable Growth
strategies Achieve enduring profitable growth by
expanding the brand and leveraging the
strengths of the McDonald's system through
innovation and technology.
