2 Operations Strategy and Competitiveness

Learning Objectives

  • Explain each of the key purchasing criteria.
  • Differentiate between order qualifiers and order winners.
  • Understand the four competitive priorities and common strategies firms use to achieve these priorities.
  • Describe the term ‘core competency.’
  • Describe the three levels of strategy.
  • Know the six categories of operations strategy categories.
  • Calculate productivity measures including partial, multi-factor and total productivity.

Competitiveness

We have all competed in various types of activities, perhaps in sports, or school. There may have been prizes or rewards for ranking high in these competitions. Business is no different. We define competitiveness as the ability and performance of a firm to sell and supply goods and services in a given market, in relation to the ability and performance of other firms.[1] In other words, how will one firm win over customers in order to become the product or service of choice.

Competitive Advantage and Key Purchasing Criteria

Competitive advantage is the leverage a business has over its competitors. This can be gained by offering clients better and greater value. Advertising products or services with lower prices or higher quality piques the interest of consumers. This is the reason behind brand loyalty, or why customers prefer one particular product or service over another.[2]

Each organization needs to have a deep understanding of their customers and what drives their customers to make purchases.  We refer to these as key purchasing criteria. They are the factors which customers evaluate and consider when making a product choice.

It is important to keep in mind that the customer is not always a consumer purchasing a good at a store. The customer in many instances may be another business. The city of Toronto may be purchasing heavy duty trucks to use in the landscaping of city parks or Toyota may be searching for a new supplier for automobile glass.

Key Purchasing Criteria include:

Price – Firms need to understand how much the customer will pay for an item. If products are seen to be very similar to one another, the customer will choose based on price.

Quality – Many customers are willing to spend more in order to obtain a product with specific characteristics or brand reputation. Not only are we considering a product with a great design, but also, one that is long lasting and defect free.

Variety – There is a part of the market that value the opportunity to choose from a wide variety of products. They look for options to change the style, colour, dimensions or technical characteristics.

Timeliness – Some customers care greatly about how long it will take to obtain the product or service. For companies’ in the transportation business, this will be a key necessity in order to gain new customers. This can also be related to the capability of the company to deliver at the time that they had promised.

Figure 2.1: Categories of key purchasing criteria.

Order qualifiers versus order winners

Two concepts related to key purchasing criteria are order qualifiers and order winners, first introduced by Terry Hill.[3] For important purchases, the customers will consider which characteristics are absolutely necessary (nonnegotiable) and which characteristics can actually lead them to make their decision.

Order qualifiers are those characteristics that are “the nonnegotiable requirements” of the customer. Unless these characteristics are part of the product or service package, the customer will look elsewhere. Order qualifiers for a car may include and minimum safety features, and air conditioning.

An order winner is the characteristic that wins the order. Often it may be a new technical feature that is desirable. It could be a great warranty package or service agreement, or a better price.

Order qualifiers and order winners change over time. What was an order winner some years ago, may now become an order qualifier and vice versa. In 1989, air conditioning in a car might have been considered an order winner. It was new and desirable. In 2020 however, few customers purchasing a new car would consider buying a car without air conditioning. It has therefore changed from an order winner to an order qualifier.

Marketing must understand what the order qualifiers and order winners are for their customers. Operations must respond promptly to ensure that they are making these options and features available to customers.

Competitive Priorities

The competitive priorities are the ways in which the Operations Management function focuses on the characteristics of cost, quality, flexibility and speed. The firm’s customers will determine which of the competitive priorities are emphasized.

Cost – Firms whose customers prioritize price will be very interested in having processes that enable them to keep their costs low. These companies are typically paying close attention to identifying and eliminating waste within their operations. By reducing defects, they will reduce costs. These firms will closely monitor and seek to improve their productivity. Factors such as resource utilization and efficiency will be important.

Quality – Firms whose customers prioritize quality focus on creating both excellent product and process design. Marketing and Engineering collaborate to design products that meet customers’ requirements.  Manufacturing must ensure that the process is able to produce the products defect-free. It is only by having excellent design quality and excellent process quality that the organization can ensure that customers will have their expectations satisfied.

Flexibility – Firms whose customers prioritize variety must prioritize the ability to change rapidly. Firms who value flexibility usually do so by carefully choosing equipment that is general-purpose and able to perform multiple functions. They will often strive to keep a small amount of spare capacity in case it is needed.  Multi-skilled employees who are able to work in various areas of the firm or operate multiple types of technology are valued. These firms want to ensure that they can get new products to market quickly and transition from making one product to another quickly. Keeping machine set-ups fast  is a critical way to do this. They also strive to be able to abruptly modify the volume of their output in case the need or opportunity arises.

Delivery (reliability and speed) – Firms whose customers prioritize speed of product/service delivery must be very efficient and quick at providing their products and services. McDonald’s and Amazon are examples of this.

Below is a table summarizing the relationship between a customer’s priority and a firm’s strategy.[4][/footnote]

Customer’s priority Firm’s strategy
Cost Minimizing product costs and waste, maximizing productivity
Quality Designing superior, durable products, minimizing defects

Flexibility
Adaptability in product design and output, utilizing general-purpose machinery and multi-skilled workers
Delivery Maintaining reliable and speedy delivery services

It is a long-held understanding that each major decision that needs to be made within the operations of an organization will include a trade-off because it is impossible for any one organization to excel on all the competitive priorities at once! An example is a manufacturer who competes on the basis of cost. In order to reduce defects, they may choose to change one of their input components for one with a better quality. This however will increase their costs.  Cost and quality are common trade-offs.  Flexibility and speed are also considered trade-offs. When organizations increase their number of options and varieties, it adds operational complexity. This will slow down their operations.

Core Competency (Core Capabilities)

Core competency is a management theory that originated in a 1990 Harvard Business Review article, “The Core Competence of the Corporation.”

Core competencies are the resources and capabilities that comprise the strategic advantages of a business. A modern management theory argues that a business must define, cultivate, and exploit its core competencies in order to succeed against the competition.

  • Core competencies are the defining characteristics that make a business or an individual stand out from the competition.
  • Identifying and exploiting core competencies are as important for a new business making its mark as for an established company trying to stay competitive.
  • A company’s people, physical assets, patents, brand equity, and capital all can make a contribution to a company’s core competencies.

A successful business has identified what it can do better than anyone else, and why. Its core competencies are the “why.”

Defining Core Competencies

In the article, C.K. Prahalad, and Gary Hamel review three conditions a business activity must meet in order to be a core competency:

  • The activity must provide superior value or benefits to the consumer.
  • It should be difficult for a competitor to replicate or imitate it.
  • It should be rare.

Some examples of core competencies:

  • McDonald’s has standardization. It serves nine million pounds of French fries every day, and every one of them has precisely the same taste and texture.
  • Apple has style. The beauty of its devices and their interfaces gives them an edge over its many competitors.
  • Walmart has buying power. The sheer size of its buying operation gives it the ability to buy cheap and undersell retail competitors.[5]

Strategy

The Strategy Hierarchy

In most corporations, there are several levels of management. Strategic management is the highest of these levels in the sense that it is the broadest and applies to all parts of the firm while also incorporating the longest time horizon. It gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Under this broad corporate strategy there are typically business-level competitive strategies and functional unit strategies.[6]

Figure 2.2: A hierarchical diagram detailing different strategies within a corporation; Credit: Abey Francis; https://www.mbaknol.com/strategic-management/business-strategy-hierarchy/

Corporate strategy refers to the overarching strategy of the diversified firm. Such a corporate strategy answers the questions of “in which businesses should we compete?” and “how does being in these businesses create synergy and/or add to the competitive advantage of the corporation as a whole?”

Business strategy refers to the aggregated strategies of a single business firm or a strategic business unit (SBU) in a diversified corporation. According to Michael Porter, a firm must formulate a business strategy that incorporates either cost leadership, differentiation or focus in order to achieve a sustainable competitive advantage and long-term success in its chosen arenas or industries.

Functional strategies include marketing strategies, new product development strategies, human resource strategies, financial strategies, legal strategies, supply-chain strategies, and information technology management strategies. The emphasis is on short- and medium-term plans and is limited to the domain of each department’s functional responsibility. Each functional department attempts to do its part in meeting overall corporate objectives, and hence to some extent their strategies are derived from broader corporate strategies.

Many companies feel that a functional organizational structure is not an efficient way to organize activities, so they are reengineered according to processes or SBUs. A strategic business unit is a semi-autonomous unit that is usually responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated as an internal profit centre by corporate headquarters.

An additional level of strategy called operational strategy was encouraged by Peter Drucker in his theory of Management By Objectives (MBO). It is very narrow in focus and deals with day-to-day operational activities such as scheduling criteria. Operational level strategies are informed by business level strategies which, in turn, are informed by corporate level strategies.[7]

Operations strategy categories can be broken down into many types of areas that must be addressed. The decisions made in these areas will determine whether the business strategy is executed. Below is a list of 10 critical decisions in operations management[8]:

  1. Design of Goods and Services – The actual design of the product or service will have the largest impact on the cost to produce and the quality to achieve.
  2. Quality – The way in which the organization will ensure that the product specifications are met. This may include the use of statistical process control, total quality management or Six Sigma.
  3. Process and Capacity Design – The type of product along with its volume and variety will have the major impact on which type of process to be chosen.
  4. Location – Important decisions such as how many locations and where to locate them are critical to organization success. This will be a major factor in terms of how quickly the transformation process can take place, and how quickly goods can be shipped to customers.
  5. Layout Design and Strategy – Consider the placement of work centres, movement of goods, people and information How materials are delivered and used.
  6. Human Resources and Job Design – Decisions regarding training for employees, how to motivate employees to achieve operational success.
  7. Supply Chain Decisions – Decisions in terms of where suppliers are located and the level of supplier collaboration are major considerations that impact cost and delivery speed.
  8. Inventory – How will inventories be used and controlled in the business and the supply chain
  9. Scheduling – includes both how to schedule production, resources and employees in order to be effective, efficient and meet commitments to customers.
  10. Maintenance– This involves maintaining equipment and machinery as well as keeping quality high and processes stable.

Common Operations Strategies

There are many types of Operations strategies; two of the most common are quality-based strategies and time-based strategies.

Quality-based strategies are commonly used when companies wish to elevate their reputation in the marketplace. Improving on their product design and the reduction of errors are the backbone of these initiatives. Firms will often use programs such as ISO9001, Six Sigma, and Total Quality Management in their efforts.

Time-based strategies are used to reduce lead time, which is the amount of time elapsed from the receipt of the customer’s order until the products are shipped. Firms that can produce faster will often have lower costs. These companies may use lean production methods to improve the velocity of their processes.

Productivity

In operations, we love to measure.  One of the key ways we judge our operational performance is by using a simple wholistic measure, which is productivity.

Productivity is referred to as a relative measure. It has little meaning in isolation but does tell a story when it is compared to the previous period, or to a similar department or organization.  The key thing we pay attention to is whether the productivity has improved or declined or stayed the same. Let’s look at several types of productivity measures, and how to calculate the percent change.

Figure 2.3: Examples of equations for productivity measures.
Figure 2.4: Percent change calculation; Credit: onlinemathlearning.com/percent-change-algebra.html

.
Output
is always a reflection of how much the firm was able to produce. If the product is homogenous, meaning it has very little variations, then expressing output as the number of units produced may be reasonable. If, however, the firm makes a variety of products with different levels of labour and material costs, then the output would likely be described by the dollar value of all the goods produced within a certain time period.

For inputs, dollars spent are typically used as the measure. Several exceptions might be labour hours, gallons of water, or kilowatts of electricity. Firms will typically measure the productivity for the things which represent significant expenditures.  A farmer might measure the pounds of meat produced as the output and the pounds of feed consumed as the input. Some other common productivity measures can be found below.

Figure 2.5: Examples of productivity measures.

End of Chapter Problems

Problem #1

Billco Windows and Doors is preparing their monthly productivity report. Their monthly costs are shown below. Calculate the a) labour productivity (output / labour hours), b) machine productivity (output / machine hours), and c) the multifactor productivity (output / labour cost + material cost + energy cost) of dollars spent on labour, materials, and energy. Average labour rate is $18.00.

Units produced: 1800

Labour hours: 1975

Machine hours: 425

Materials cost: $81000

Energy cost: $21600

Solution

a) Labour productivity (output / labour hours)
= 1800 / 1975
= .91 units per labour hour

b) Machine productivity (output / machine hours)
= 1800 / 425
= 4.23 units per machine hour

c) Multifactor productivity (output / labour cost + material cost + energy cost)
= 1800 / (1975 x $18 + $81000 + $21600)
= .013 units per dollar spent

Problem #2

A company makes seasonal jams and jellies. Yesterday they produced 420 jars of jam with five workers who each worked an 8-hour day. What was the labour productivity?

Solution

= 420 / (5 workers x 8 hours)
= 10.5 jars per worker hour

Problem #3

A greeting card company manufactured 3500 cards in one day. Labour cost was $1200, material cost was $90, and overhead was $450. What is the multifactor productivity?

Solution

= 3500 / ($1200 + $90 + $450)
= 2.01 cards per dollar of input

Problem #4

Joe has purchased a pizza franchise and is learning how to measure productivity. Calculate the a) food cost productivity, b) labour productivity, and c) total productivity. Also calculate the percent change for each measure.

 

June

July

Sales

$52500

$59650

Food cost

$15750

$16702

Labour cost

$11550

$14912

Overhead cost

$3500

$3500

Solution

 

June

July

% Change

a) Food cost productivity

52500 / 15750
= $3.33

59650 / 16702
= $3.57

(3.57 – 3.33) / 3.33 x 100
= +7.21% 

b) Labour productivity

52500 / 11550
= $4.55

59650 / 14912
= $4.00 

(4.00 – 4.55) / 4.55 x 100
= -12.09%

c) Total productivity

52500 / (15750 + 11550 + 3500)
= $1.70

59650 / (16702 + 14912 + 3500)
= $1.70

(1.70 – 1.70) / 1.70 x 100
= 0%


  1. Wikipedia contributors. (2019). Competition (companies). In Wikipedia, The Free Encyclopedia. Retrieved on January 6, 2020, from https://en.wikipedia.org/w/index.php?title=Competition_(companies)&oldid=920132676
  2. Wikipedia contributors. (2019). Competitive advantage. In Wikipedia, The Free Encyclopedia. Retrieved on January 6, 2020, from https://en.wikipedia.org/w/index.php?title=Competitive_advantage&oldid=923650944
  3. Hill, T. (2000). Manufacturing Strategy: Text and Cases. 3rd ed. New York: McGraw-Hill.
  4. [footnote]Garo Junior, W., & Guimarães, M. (2018). COMPETITIVE PRIORITIES AND STRATEGIC ALIGNMENT AS MEDIATORS IN THE RELATIONSHIP BETWEEN COMPANIES IN THE BRAZILIAN AUTOMOTIVE SUPPLY CHAIN. The South African Journal of Industrial Engineering, 29(1), 184-194. doi:https://doi.org/10.7166/29-1-1791
  5. Twin, A. (2019). Core Competencies. Retrieved on January 6, 2020, from https://www.investopedia.com/terms/c/core_competencies.asp
  6. Francis, A. (2011). Business Strategy Hierarchy. Retrieved on January 6, 2020, from https://www.mbaknol.com/strategic-management/business-strategy-hierarchy/
  7. Business Strategy/Approaches to Strategic Management. (2017). Wikibooks, The Free Textbook Project. Retrieved on January 6, 2020, from https://en.wikibooks.org/w/index.php?title=Business_Strategy/Approaches_to_Strategic_Management&oldid=3337918
  8. Kettering University. (2018). 10 Critical Decisions of Operation Management. Retrieved on January 6, 2020, from https://online.kettering.edu/news/2018/05/11/10-critical-decisions-operations-management

License

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Introduction to Operations Management by Mary Drane and Hamid Faramarzi is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License, except where otherwise noted.