Operations Strategy

Leeds School of Business University of Colorado Boulder, CO

Professor Stephen Lawrence

Factories at Asnieres Seen from the Quai de Clichy Van Gogh

Summary of

OPERATIONS MANAGEMENT

Operations 80-90% Hidden

Transformation Definition
INPUTS
Materials Goods Labor Transformation Processes Services Knowledge

OUTPUTS

Capital

Added Value Model

Cost
Finance Accounting Information Systems People and Organization Marketing

Profit!

Operations

Added Value for Customer

adapted from Porter, Competitive Advantage, Free Press, 1985

The Value Equation

Performance Value price
Quality Timeliness Flexibilit y Innovation Value price

Q T F I Value P

Evolution of Operations Strategy

Operations in the 50s & 60s

Germany, Japan, Europe, and Asia
Industrial infrastructure destroyed in WWII

U.S. without significant international competition

1945 to 1970

The problem of production has been solved.

John Kenneth Gailbraith

noted economist, 1950s

Operations largely ignored, not strategic

Manufacturing: Missing Link in Corporate Strategy

Wickham Skinner, Harvard Business Review, May-June 1969

Corporate management abdicates manufacturing strategy to low levels

Viewed as requiring technical skills Morass of petty details

Companies become saddled with noncompetitive production systems Strategic manufacturing issues involve

Plant and equipment Production Planning and control Labor and staffing Product design and engineering Organization and management
Manufacturing: Missing Link in Corporate Strategy,Wickham Skinner, Harvard Business Review, May-June 1969

The Focused Factory

Wickham Skinner, Harvard Business Review, May-June 1974

Observations of 50+ factories

There are many ways to compete besides low cost A factory cannot perform well on every yardstick Factories were provided with inconsistent objectives

Focus on cost and efficiency rather than other measures

Problem: Too many factories try to do too much Solution: The focused factory
Simplicity and repetition breed competence Focus on relative competitive ability Limit scope of factorys responsibilities Limit overhead, focus on production
The Focused Factory,Wickham Skinner, Harvard Business Review, May-June 1974

Why Japanese Factories Work

Robert Hayes, Harvard Business Review, Jul-Aug 1981

Toured eight plants at six Japanese companies What I did not see
Few modern structures, robots, quality circles Aside: Toyota, GM, and NUMMI (1984)

What I did see

Clean orderly workplaces Almost total absence of inventory root of all evil Stability and continuity in manufacturing processes
Bottlenecks eliminated, machines & people not overloaded Continuous equipment monitoring, preventative maintenance No-crisis atmosphere

Pursuing the last grain of rice approach to quality Long term commitment to employer, employees, customers
Why Japanese Factories Work,Robert Hayes, Harvard Business Review, Jul-Aug 1981

Competing Through Manufacturing

Wheelwright and Hayes, Harvard Business Review, Jan-Feb 1985

How effectively do companies use operations? Continuum of four stages

Stage 1: Internally Neutral
Minimize negative impact of operations

Stage 2: Externally Neutral

On par with competitors

Stage 3: Internally Supportive

Provide credible support to business strategy

Stage 4: Externally Supportive

Ops used to create competitive advantage

Competing Through Manufacturing,Wheelwright & Hayes, Harvard Business Review, Jul-Aug 1985

Frugal Manufacturing
Schonberger, Harvard Business Review, Sep-Oct 1987

U.S. manufacturing an extravagance of scale

Too many U.S. plants are too large, too complex

Achieve a frugal focus

Improve/adapt conventional machines before automation

Dont abrogate manufacturing strategy to lower levels, vendors

Improve capability to modify, customize, & simplify Consider bigger and faster equipment with caution Automate only when benefits are clear

Factories within factories

Split plants when they become too large

These ideas came to be know as lean manufacturing

Frugal Manufacturing,Schonberger, Harvard Business Review, Jul-Aug 1985

Manufacturing Operations Strategy

Emerging consideration of other means of competition

Garvin, Competing on the Eight Dimensions of Quality, HBR 1988 Stalk, Time The Next Source of Competitive Advantage, HBR 1988 Stalk, Evans, and Schulman, Competing on Capabilities, HBR 1992 Upton, What Really Makes Factories Flexible? HBR 1995 Gilmore and Pine, Four Faces of Mass Customization, HBR 1997

Emerging consideration of service operations

Heskett, Lessons of the Service Sector, HBR 1987 Reichheld and Sasser, Zero Defections: Quality Comes to Services, HBR 1990 Schlesinger and Heskett, The Service-Driven Service Company, HBR 1991

Emerging Issues of Ops Strategy

Management of KNOWLEDGE Supply chain management Outsourcing and offshoring Education and training
Moving up the food chain

Focus on core competencies versus Economies of scale

Implementing Operations Strategy: Four Views

Implementing Operations Strategy

1. 2. 3. 4. Strategy as Evolutionary Search Strategic Differentiation The Balanced Scorecard Business Performance Excellence

Strategy as Evolutionary Search

Beinhocker On the origin of strategies, The McKinsey Quarterly, November 4, 1999.

The Origin of Strategies

Evolution across a population is natures trick for mastering uncertainty. Businesses can use it to. Complex systems exhibit
Emergent patterns of behavior Punctuated equilibrium Path dependence

Cant rely on patterns and predictions

Beinhocker, On the origin of strategies, The McKinsey Quarterly, Number 4, 1999.

Evolutionary Fitness Landscapes

Business strategy similar to evolutionary survival
Companies = Species Business Strategies = Gene Combinations

Combination of genes (strategies) determine fitness

Some combinations work (survival) Others dont work (extinction) Fitness landscape changes constantly

Beinhocker, On the origin of strategies, The McKinsey Quarterly, Number 4, 1999.

Rugged Fitness Landscape

Beinhocker, On the origin of strategies, The McKinsey Quarterly, Number 4, 1999.

Rules for Evolutionary Search

Never sit still Search in parallel Search strategies
Marginal hill climbing (evolutionary)
Dramatic pogo stick jumps (revolutionary) Use both

Devote some resources to risky experimentation Can we afford not to? vs. Can we afford to?
Beinhocker, On the origin of strategies, The McKinsey Quarterly, Number 4, 1999.

Strategic Differentiation

Treacy and Wiersema, Discipline of Market Leaders, 1997

Models for Strategic Differentiation

Operational Excellence
Low/Best Total Cost

Best Total Solution

Customer Intimacy

Product Leadership
Best Products / Product Innovation

Operational Excellence
Provide unmatchable combination of price, quality, delivery, and ease of purchase Execute extraordinarily well Value proposition is guaranteed best total cost and hassle-free service Processes are optimized and streamlined to minimize costs Culture abhors waste, rewards efficiency Organizational heroes are in operations

Operational Excellence
Value

Q T F I

Focus on Productivity & Price

Quality means consistency, conformance, and reliability Timeliness means on-time delivery

Best Total Solution

Deliver to specific customer needs, not broad market requirements Intimately know customers; know exactly what products and services they need Continually tailor products and services to specific customers at reasonable prices Customer loyalty a key asset; cultivate relationships rather than pursue transactions Give customers more than they expect, constantly upgrade product offerings Organizational heroes are in marketing & sales

Best Total Solution

Q T F I Value
P

Focus on Timeliness & Flexibility

Timeliness means delivering on-demand Flexibility means the customer is always right Quality means service

Product Leadership
Continually push products into unknown areas Strive to provide leading edge products or new applications for existing products Commercialize new products quickly Business processes engineered for speed Relentlessly pursue product innovation Willing to quickly obsolete existing product Organizational heroes are engineers & scientists

Product Leadership

Q T F I Value
P

Focus on product Innovation

Quality means performance, features, and aesthetics Timeliness means rapid new product introductions and planned obsolescence

Without Strategic Differentiation

Operations
Focuses on price, and consistent quality

Marketing
Focuses on giving customers what they want

Engineering (R&D, product development)

Focuses on innovative new products

No consistent focus; organizational dysfunction; declining profits

Employees work harder & harder to achieve

less and less

Differentiation Life Cycle

Product Leadership
Best Total Solution Operational Excellence

Balanced Scorecard

Kaplan & Norton, The Balanced Scorecard, 1996.

Balanced Scorecard
How do customers see us?

Financial Measures

How do we look to shareholders?

Customer Measures

Internal Business Measures At what must we excel?

How to improve & create value?

Innovation & Learning Measures

Kaplan and Norton, The Balanced Scorecard Measures that Drive Performance, Harvard Business Review, Jan/Feb 1992.

Financial Measures
Survive
Cash flow

Succeed
Quarterly sales growth Operating income

Prosper
Increased market share ROE
Kaplan and Norton, The Balanced Scorecard Measures that Drive Performance, Harvard Business Review, Jan/Feb 1992.

Customer Measures
New Products
Percent of sales from new products Percent of sales from proprietary products

Benefits
Quality Timeliness Flexibility

Value
Kaplan and Norton, The Balanced Scorecard Measures that Drive Performance, Harvard Business Review, Jan/Feb 1992.

Internal Measures
Technological capability
Proprietary capabilities

Productivity
Traditional productivity measures

Internal quality
Scrap and reject rates

New product introduction

Schedule vs. plan
Kaplan and Norton, The Balanced Scorecard Measures that Drive Performance, Harvard Business Review, Jan/Feb 1992.

Innovation & Learning

Technology leadership
Time to develop next generation

Time to market
New product introduction vs. competition

Process improvement
Cost reduction, quality improvement Improved customer service

Kaplan and Norton, The Balanced Scorecard Measures that Drive Performance, Harvard Business Review, Jan/Feb 1992.

Balanced Scorecard
How do customers see us?

Financial Measures

How do we look to shareholders?

Customer Measures

Vision and Strategy

Internal Business Measures At what must we excel?

How to improve & create value?

Innovation & Learning Measures

Kaplan and Norton, The Balanced Scorecard Measures that Drive Performance, Harvard Business Review, Jan/Feb 1992.

Business Performance Excellence (BPE)

Dr. Jeff Luftig, Leeds School of Business

Purpose of Policy Deployment:

Establishing the Point of the Compass

Typical Structure w/Out An Integrated Policy Deployment System

Initial Result Achieved After Implementing a Policy Deployment System

Final Result Achieved After Implementing a Policy Deployment System

Steps of Policy Deployment

Create Vision, Mission, and Value Proposition
Vision looks out 5-10 years Mission looks out 3-5 years Value Proposition explains why customers will

purchase from us instead of competition

Decide upon a Model for Strategic Differentiation Develop key performance measurements that will realize the Mission, Vision, and Value Proposition Deploy to the organization
Easy to say, hard to accomplish!

Rules for Vision & Mission

1. Never state anything that you do not intend to measure, and subsequently allocate resources to achieve. 2. If it is critical to your organization, always state it. 3. Never state anything that makes the management team look foolish.

Metal Surface Finisher

Vision The vision of ABC is to be regarded as among the best surface finishers in the country for the services we choose to provide. Mission Achieve near-term profitability by providing high quality surface finishing and

related technical services to companies where surface finishing is significant

to the success of their businesses, while maintaining environmentally sensitive and safe operations. Value Proposition ABC provides surface finishing with the highest product quality and value-added technical services, to deliver the lowest total cost solution for our customers. Strategic Differentiation Operational Excellence -- Provide customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience.

Steps of Policy Deployment

Create Vision, Mission, and Value Proposition
Vision looks out 5-10 years Mission looks out 3-5 years Value Proposition explains why customers will

purchase from us instead of competition

Decide upon a Model for Strategic Differentiation Develop key performance measurements that will realize the Mission, Vision, and Value Proposition Deploy to the organization
Easy to say, hard to accomplish!

Models for Strategic Differentiation

Operational Excellence
Low/Best Total Cost

Best Total Solution

Customer Intimacy

Product Leadership
Best Products / Product Innovation

Steps of Policy Deployment

Create Vision, Mission, and Value Proposition
Vision looks out 5-10 years Mission looks out 3-5 years Value Proposition explains why customers will

purchase from us instead of competition

Decide upon a Model for Strategic Differentiation Develop key performance measurements that will realize the Mission, Vision, and Value Proposition Deploy to the organization
Easy to say, hard to accomplish!

Metal Surface Finisher

Vision The vision of ABC is to be regarded as among the best surface finishers in the country for the services we choose to provide. Mission Achieve near-term profitability by providing high quality surface finishing and

related technical services to companies where surface finishing is significant

to the success of their businesses, while maintaining environmentally sensitive and safe operations. Value Proposition ABC provides surface finishing with the highest product quality and value-added technical services, to deliver the lowest total cost solution for our customers. Strategic Differentiation Operational Excellence -- Provide customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience.

Construct Analysis
Constructs
Regarded as among the best surface finishers in the country Lowest total cost solution

Level I CPM's
Reputation with target customers Profit

Near-term profitability
High quality surface finishing Highest product quality Environmentally sensitive operations Safe operations

Costs
Revenues Product quality Environment compliance Safety compliance

Steps of Policy Deployment

Create Vision, Mission, and Value Proposition
Vision looks out 5-10 years Mission looks out 3-5 years Value Proposition explains why customers will

purchase from us instead of competition

Decide upon a Model for Strategic Differentiation Develop key performance measurements that will realize the Mission, Vision, and Value Proposition Deploy to the organization
Easy to say, hard to accomplish!

Fault Tree Construction

Vision/Mission/Value Prop

Level I CPMs

Level II

Level III

Level IV

CPM Breakdown
Revenue
Revenue by production line
Revenue by customer

Costs
Costs by production line
Costs by operator Costs by product type Costs by customer

Continue for all Level I CPMs

Issues & Problems with BPE

Difficult to understand, explain in places Still relies on managerial judgment and insight! Cannot fix a bad top-level strategy More difficult to implement than it looks Cannot overcome poor implementation HARD WORK!

The Promise of BPE

We have the tools:
JIT, TOC, SPC, MRP, ERP, EOQ, ABC, Many other TLAs (three letter acronyms)

Too often we have a hammer looking for something to pound anything! BPE works to constructively focus efforts on profitability and success!

Benefits of BPE

BPE Policy Deployment Launched

Operations Strategy
Leeds School of Business University of Colorado Boulder, CO

Professor Stephen Lawrence