Competitiveness and

Operations Strategy

2
Unit Introduction
As citizens of the global village we are all increasingly conscious of the intensely
competitive world we live in today. Without the competitive edge, no economic
unit can survive. Free market economies and rapid globalization highlight the
necessity of being proactive, and anticipating changes to keep pace with or rather
stay ahead of the competition. Competitiveness is an important factor in
determining whether a company prospers, barely gets by, or fails. To meet this
competitive challenge, every business needs to be focused on strategic planning
in their operations management - what is known as ‘Operations Strategy’.
Effective operations strategies lead to productive, competitive organizations, and
primarily aims at improving competitiveness. Hence, there exists a direct link
between effective operations strategy and competitiveness. The goal of this unit
is to present a detailed conceptual framework for the management of the
operations strategies in organizations. The main aspects covered in this unit are,
Competitiveness and Competitive Advantage, Operations Strategy, and
competitive issues like Productivity, Quality, Technology and Globalization.
These are separate but related topics that are vitally important to business
organizations. Competitive issues like productivity relate to how effective an
organization is in the use of its resources; competitiveness relates to how
effective an organization is in the marketplace compared with other organizations
that offer similar products or services. And strategies, especially operations
strategies, shape the plans that determine the direction an organization takes in
pursuing its goals.
School of Business

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Lesson One: Competitiveness and Competitive Advantage

Lesson Objective
After completing this lesson you will be able to:

Explain the meaning of competitiveness

Identify the different distinctive competitiveness

Discuss the traditional and modern views of competitiveness

Justify the importance of competitiveness in operation strategies

Understanding competitiveness and its importance in operations strategies

Competition and market conditions in the industry guide the general thrust of the
operations process, which provide the basis for determining the organization’s
strategy. A careful analysis of market segments and the ability of the competitors
to meet the needs of these segments will determine the best direction for focusing
an organization’s efforts. In doing so, competitive priorities should be established
in the various areas of an organization. These will help the managers identify
their abilities or competencies, which will arm the organization with the
competitive edge.

Distinctive Competencies
One way to compare manufacturing among industrial centers is to examine the
Competitiveness or
varying competitive priorities, such as, quality, performance, price, adaptation, competitive advantage
after sales service, etc. Competitiveness or competitive advantage denotes a denotes a firm’s ability
firm’s ability to achieve market superiority over its competitors. In the long run, to achieve market
a sustainable competitive advantage provides above-average performance. A superiority over its
competitors.
strong competitive advantage is derived from an organization’s competitive
priorities, or rather distinctive competencies. A distinctive competency should
have six (6) characteristics:
i. It is driven by customer wants and needs.
ii. It makes a significant contribution to the success of the business.
iii. It matches the organization’s unique resources with the
opportunities in the environment.
iv. It is durable and lasting and difficult for competitors to copy.
v. It provides a basis for further development.
vi. It provides direction and motivation to the entire organization.
Hence, we can conclude that distinctive competencies can be defined as those
special attributes or abilities possessed by an organization that give it a
competitive edge. In effect, distinctive competencies relate to the way that
organizations compete. The most effective organizations seem to use an approach
that develops distinctive competencies based on customer needs as well as on
what the competition is doing. Merely matching a competitor is not sufficient, it
is necessary to exceed the quality level of the competitor.

Depending on these distinctive competencies any company can achieve

The best performing
competitive advantage1 through acts of innovation and new ways of doing things, company will be the
such as new product designs, production technologies, training programs, quality one that can generate
control techniques, or new way to manage supplier relationships. It is also to be greatest customer
noted that mere competence does not constitute a competitive advantage. The value and sustain it
best performing company will be the one that can generate greatest customer over time.

1
Porter, Michel E. “Competitive Advantage of Nations,” Harvard Business Review, (March – April, 1990).

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value and sustain it over time. For example Virgin cola was marketed in a
premium price of Tk.15 per can, which is still the cheapest drink in canned form,
whereas the other contemporary drinks cost at least Tk.20 per can. Actually,
virgin succeeded to fulfill the customer need not only through its price but also
through its form which makes the customer feel distinctive from others.
However, the differentiation in the form gave virgin brand distinctive
competencies and market superiority over other brands in the market.

Four (4) Distinctive Competencies /Competitive Priorities

The four distinctive competitive priorities can be characterized as follows (Table
2.1.1):
1. Cost Efficiency (Low product price): A company that emphasizes cost
efficiency will see that it’s capital, labor and other operating costs are kept
low, relative to other similar companies.
2. Quality (Product performance): A company that emphasizes quality will
consistently strive to provide a level of quality that is significantly superior to
that of its competitors, even if it has to pay extra to do so.
3. Dependability (reliability, timely delivery): A company that stresses
dependability can be relied upon to have its goods available for customers, or
to deliver its goods or services on schedule, if it is at all possible.
4. Flexibility (new products or change in output volume): A company that
develops flexibility can quickly respond to competitors’ changes in product
design, product mix, or production volume by changing their own.
Table 2.1.1 Competitive priorities and some ways of creating them
Competitive Definition Some ways of creating
Priority
Unit cost of each product / • Redesigning of products
service, including labor, • New production technologies
Cost
material, and overhead • Increase in production rate
Efficiency
costs • Reduction of scrap
• Reduction of inventories
Customers’ perceptions of • Use of CAD / CAM
degree of excellence • Improve product / service in terms
exhibited by products of : appearance, malfunction or
Quality
/services defect rates, performance and
function, war, endurance ability,
after-sales service
Fast delivery • Larger finished-goods inventories,
effective scheduling system
• Faster production rates
Dependability
• Quicker shipping methods
(Delivery
On-time delivery • More realistic promises
performance)
• Better control of production of
orders
• Better information systems
Ability to quickly change • Change in type of production
production to order process used
products /services and • Multi-skilled workers
Flexibility other production volumes, • Reduction of amount of work in
customer responsiveness process through JIT
• Increase in production capacity

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Time as a Distinctive Competency

Apart from the four factors (Cost efficiency, quality, dependency and flexibility),
time is emerging as a critical dimension of competition in both manufacturing Time is emerging as
and service industries. In any industry the firm with the fastest response to critical dimension in
customer demand has the potential to achieve overwhelming market advantage. every types of
industry.
In an era of time-based competition, a firm’s competitive advantage is defined
not by cost but by the total time required to produce a product or service. Firms
able to respond quickly have reported growth rates over three times the industry
average and double the profitability. Thus the payoff for quick response is market
dominance. These basic strategic choices, then, set the tone for the shape and
content of the operations function and what it accomplishes. A conversion
process designed for one type of focus is often ill suited for success in another,
alternative focus.

Traditional View of Competitiveness

The traditional literature on competitiveness suggests that a firm can possess two
basic types of competitive advantages:
i. Cost leadership
ii. Product differentiation

i. Cost Leadership
Many firms gain competitiveness by establishing themselves as low-cost leaders Low cost leadership
in the market. These firms produce high volumes of mature products and achieve can be achieve through
their competitive advantage through low prices. Such firms often enter markets producing high
volumes of product
that were established by other firms. They emphasize achieving economies of with low price.
scale and finding cost advantages from all sources. Low cost can result from high
productivity and high capacity utilization. More importantly, improvements in
quality lead to improvements in productivity, which in turn lead to lower costs.
Thus a strategy of continuous improvement is essential to achieve a low-cost
competitive advantage.

For example in the 1980’s GQ group in Bangladesh introduced Econo ballpoint

pen to the market at a cost of Tk. 3 per unit. This introduction brought a prompt
change in consumers’ satisfaction and consumption level. The reason behind this
is their quality product in low cost which shook the market of the other existing
ball point pens, even Red Leaf and Staedtler, the two product leaders. Thus
Econo’s low cost resulted in high productivity and the greatest market share.

ii. Product Differentiation

Product differentiation refers to any special features (e.g. design, cost, quality, To achieve product
ease of use, convenient location, warranty, etc.) that cause a product to be differentiation a firm
perceived by the buyer as more suitable than a competitors product or service. To therefore must be
unique in its industry
achieve differentiation, a firm therefore must be unique in its industry along along some dimensions
some dimensions that are widely valued by customers. It selects one or more that are widely valued
attributes that customers perceive as important and positions itself uniquely to by customers.
meet those needs. As a result, it can command premium prices and achieve
higher profits. However, a firm that uses differentiation cannot ignore costs. It
must achieve a cost position at par with its competitors and reduce costs in all
areas that do not affect differentiation.

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A part of cost- Modern View of Competitiveness

efficiency & product More recently, the modern view towards competitive advantage has been focused
differentiation the on adopting more Quality-based and Time-based competitiveness. However at
modern view includes the same time keeping in mind cost-efficiency and product differentiation.
quality & time towards
competitiveness.
• Quality
This focuses on satisfying the customer by integrating quality into all phases of
the organization. This includes not only the final product or service that is
provided to the customer, but also the related processes such as production,
design, and after-sales service.

• Time
It focuses on reducing the time required to accomplish various activities. By
doing so, organizations seek to improve services to the customer, and to gain a
competitive advantage over rivals who take more time to accomplish the same
tasks.

Importance of Competitiveness in Operations Strategy

As we have defined earlier, the competitiveness of a firm is its ability to achieve
market superiority over other competitors. Operations strategy, on the other hand,
is a collective pattern of coordinated decisions for the formulation, reformulation,
and deployment of the organization’s resources. These decisions provide a
competitive advantage in support of the overall strategic initiative of the firm or
strategic business units. Operations strategy is a pattern of decisions made over
time. These decisions focus on resource configuration and deployment. For
example, how many work shifts, which type of machinery, what kind of
reporting structure, and which type of information to use are all decisions about
how to use resources. The resulting configurations of the firm’s resources must
provide or support the firm’s strategic advantage in the market place. So for the
survival of the firms, considerations of competitive advantage in operation
strategy are very important.

Summary
Competitiveness or competitive advantage of a firm denotes its ability to achieve
market superiority over its competitors. In other words how effectively an
organization meets the needs of customers relative to other organizations of the
same specialization represents its competitive advantage. Characteristics of
competitive priorities are product performance, low product price, dependability
and flexibility. The management effort towards improvements in quality lead to
improvements in productivity, which in turn lead to lower costs. Cost is a vital
factor for surviving in the market. Therefore many firms gain competitiveness by
establishing themselves as low cost leaders in the market.

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Cost Efficiency or Differentiation

Well-done Garments is a firm that has recently entered the ready-made garments
industry. The managing director is concerned about gaining market share.
Currently Jolly Zee Apparels dominates the market, in terms of exports. Mr. Case
Khan the MD is contemplating a change in certain aspects of the company’s Analysis
operations. At the moment he refuses to compromise on the level of quality
maintained, and consequently it is difficult to keep costs low. However this
higher quality has given them the best reputation among the new comers in the
market. The company focuses on-time delivery, but being small firm lacks
flexibility in technological terms. Jolly Zee Apparels follows a cost leadership
model, offering lower prices to foreign buyers. Mr. Khan is considering cutting
costs, and charging lower prices to attract large orders. He hires a consultant
before making a final decision.

Case questions
1. What is the category in which the company’s competitive advantage can be
classified?
2. Do you feel that Well-done Garments should concentrate on improving its
cost-efficiency first, and then shift its focus to differentiation?
3. Assuming you are the business consultant, what advice would you give Mr.
Khan?

The causes of poor Competitiveness

According to the report of the BASC (Business Advisory Service Center) there
are some basic causes of poor local and global competitiveness of Bangladeshi
firms or companies. The decision making process of these companies is based on Case
short term horizons which results in under investment in research and Analysis
development. They failed to recognize the threats posed by foreign competitors,
neglected the manufacturing function relative to other functional areas of the
company and under invested in physical and human capital. There is a lack of
cooperation among departments within firms that led to too little communication
among marketing, product design, process design engineering and
manufacturing. Consequently, firms have ended up with products unsuitable to
customer needs or wants, products that needed redesigning, products unsuitable
to the manufacturing capabilities of an organization, and products lacking
sufficient quality to be competitive in the market place. Moreover, most of the
companies or firms have the tendency to view labor as a cost factor to be
minimized instead of a valuable resource underestimating the importance of
training, motivation and adaptability. Finally, there are some weaknesses in
technological practice, often characterized by emphasizing rapidly to the market,
and subsequently, to a loss of market position.

Case questions
1. As a manager, do you agree with the causes of poor competitiveness traced
out by the BASC? If yes, than how will you handle the problems to
overcome the situation? If no, then give reasons to support your opinion.
2. Define your production/operation strategy. Describe how your strategy
leads your organization to a competitive advantage.

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Discussion questions

1. What do you understand by the term competitiveness?

2. Suppose you are a production manager in a finished leather based goods
industry. Earnings of your company have been reduced this year. Your top-
level management asked you to find the reasons for incurring less profit and
how to overcome such types of problems. How would you analyze the
situation to make your recommendations?
3. How are considerations of competitiveness important for operation strategy?
4. ‘Competitiveness is driven by customer wants and needs’- Explain.
5. Give a real life example of competitive advantage of an organization which
is difficult to copy.
6. ‘Improvements in quality lead to improvements in productivity’- Do you
agree? Justify your answer.

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Lesson two: Operations Strategy

Lesson Objectives
After completing this lesson you will be able to:

Understand the key issues of corporate and operations strategies

Explain the formulation of strategic planning

Identify the operations strategy frame work

Discuss the operations function positioning decision

Explain the modern view of organizational strategies

Operations: A Vital Element in Strategy

The operations function has great value as a competitive weapon in a company’s
strategy and consequently plays an important role in implementing a strategy.
The operations function establishes the desired level of quality as a product is
manufactured or as a service is provided. Often it is responsible for the largest
portion of the company’s human and capital assets. Thus much of a product’s
cost is incurred within operations, and this cost affects the price that must be
charged and the profit margin that can be achieved. Finally, the ability of the
operations functions to perform determines, to a great extent, the ability of the
company to have sufficient products available to meet delivery commitments.

Corporate and Operations Strategies

Largely because of foreign competition and the technological explosion, there is
a growing recognition that a firm competes not only with new products, creative
marketing, and skillful finance, but also with unique competencies in operations.
The organization that can offer superior products and services at lower prices is a
formidable competitor. It is clear that the operation function has an important
influence on the cost, quality, and availability of the company’s goods or
services. Therefore, it is an organization’s operations that determine its
distinctive competencies.

Whatever the type of organization, top management is responsible for relating the Corporate strategy is a
organization’s efforts to its long-term future, setting a corporate strategy. Putting long-term master plan
it in a different way, their responsibilities include determining the organization’s of how the company
mission (the broadest expression of the direction in which a company will apply will pursue its mission
its efforts), monitoring and adjusting to changes in the environment, and of
identifying the organization’s distinctive competencies. Corporate strategy is a
long-term master plan of how the company will pursue its mission. It establishes
the general direction in which the company will move. Operations strategy
specifies how operations can achieve the organization’s overall goals, within the
framework of corporate strategy. Therefore the operations strategies are in more
detail than the corporate strategy and therefore allows every level of management
to do their best to achieve the organization’s mission.

Corporate strategy provides focus to design operations strategies

Corporate strategy is an outcome of scan of the socio-econo-political
environment plus the market in which the organization functions or planning to
function. In brief, it is the goal or target that it wants to achieve in the long run.
The goal determines the techniques, called competitive priorities, that would be

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used in competition. Nature of the competitive priorities selected determines the

operations strategy that would come into play in behalf of the corporate strategy.

(a) Involvement of top management

Top managers formulate strategies to provide more definitive direction and
guidance to the organization. In formulating strategies, top managers establish
corporate objectives and make broad-reaching decisions on such matters as the
breadth of the product line the company will choose to offer, the geographical
scope it will try to serve, the types of social involvement in which the company
will engage, the amount of resources that will be committed to various company
endeavors and the performance objectives for such matters as the company’s
market share, growth, and profitability.

(b) Communication strategy and coordinated effort

Communication Strategy is vital to achieve a coordinated effort. It is logical that
decisions and actions within a company will be better coordinated and will be
more consistently directed toward the company’s strategic goals if the company’s
strategy is explicitly recognized. Objectives and policies that are consistent with
the overall strategy should, therefore, be formulated, communicated, and
recognized throughout the organization. Operations managers and managers in
all parts of the company must formulate plans and make decision within the
context of the corporate strategy and policies if they are to achieve a unified
effort towards corporate objectives. Strategies and tactics for the functional areas
must be formulated to be consistent with corporate objectives and strategy. This
process results in a hierarchy of lower-level objectives aligned to carry out the
corporate strategy.

Different Strategies for Different Operations

Different companies in the market produce different kinds of products and
services. Each product has its own specialty. So keeping that in mind the strategy
of different operations should be different to accommodate the different
circumstances and objectives. Table 2.2.1 highlights different strategies for
different operations.
Table 2.2.1 Different strategies for different operations
Type of Type of Typical Process Typical Characteristics
Operation Product Characteristics of Market Strategy
Service/ Make to order Use of broadly skilled Ability to provide
Project as customer workers, general purpose desired features, to
specifies equipment, emphasis on perform a quality job,
good initial planning, and to achieve
quality, flexibility. reasonable delivery
times.
Continuous/ Standardized Use of specialized workers, Market research to
Process equipment, automation, ensure desirability of
emphasis on cost-efficiency features; selling an
and good distribution already designed
system to make items product, and the
readily available desirability of the price,
availability, service

Strategic Planning & Strategy Formulation

The best way to determine an organization’s strategy is to observe what the
organization actually accomplishes over time. Strategic planning is built on a few

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fundamental concepts. Here current decisions are based on future desired

conditions and results. Strategic planning is a process. It embodies a philosophy In the strategic plan
current decisions are
and provides a linkage or structure within the organization. Strategic planning is
based on future
the process of thinking through the current mission of the organization and the conditions & result.
current environmental conditions facing it, then setting forth a guide for
tomorrow’s decisions and results. Operations managers introduce strategic plans
to their work-areas for production and operations, and then identify several
competitive pressures that managers can turn into operating advantages for their
firms. In the operations function, strategic planning is the broad, overall planning
that precedes the more detailed operational planning.

In the organization the operations strategic plan is depended upon as the basis for
operational planning of facilities and operational planning for the use of these
facilities. Therefore, it is important to note that operational planning should not
be done in vacuum. It must come under the umbrella of an effective strategic
planning. There are three contrasting modes of strategic planning:

i. Entrepreneurial mode, where one strong, bold leader takes planning

action on behalf of the production/operations function.
ii. Adaptive mode, where a manager’s plan is formulated in a series of
small, disjointed steps in reaction to disjointed environment.
iii. Planning mode, which uses planning essentials combined with the
logical analyses of management science.

The key point in strategic planning approaches is that the operations strategies
Operations strategies
must be consistent with the overall strategies of the firm. A strategic planning must be consistent
model for operations is shown in Table 2.2.2. Here, in-group sessions or with the overall
individually, analysts assess environmental considerations together with the strategies of the
organization’s current production/operations position, thus forcing management firm.
to formulate strategic options for operations.
Table 2.2.2: A strategic planning model
Environmental Assessment Organization’s Position
Broad economic assumption Statement of mission
↓ ↓
Key governmental/regulatory threats Interrelation set of financial and non-
↓ financial objectives
↓
Major technological forces Statement of strengths and weaknesses
↓ ↓
Significant marketing opportunities/threats Forecast of operations: profits and cash
↓ flows
↓
Explicit competitive strategies for each major Major future programs
competitor
↓ ↓
STRATEGIC OPTIONS
Strategic options (at least two)
Requirements for implementing each strategy
Contingency plans

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Operations Strategy Framework

Operations strategy, for both manufacturing and services, tries to link the policy
decisions associated with operations to the market place, the environment, and
the company’s overall goals (Table 2.2.3). The four distinctive competencies
(market-based criteria for success) mentioned in Lesson 1 are shown here linked
to corporate strategy.

Table 2.2.3: Operations strategy framework

ENVIRONMENT → CORPORATE ← CORPORATE

AND INDUSTRY STRATEGY RESOURCES
↑
Cost efficiency
Dependability
Quality
Flexibility
↓
Facility Mission
↓
Process Capacity Facilities Vertical Integration Infrastructure
• Automation • Loading • Size • Supplier control • Planning and control
• Product/Service specificity • Lead/Lag • Location • Customer control • Work force
• Interconnectedness • Interdependencies • Quality control

One feature of this model that is crucial to competitiveness is the market-based

view of strategic planning. It suggests that any strategic business unit of a
company operates in the context of its corporate resources, the general and
competitive industry environment, and the specific corporate goals of the
company. In any area in which the company chooses to compete is a set of
specific distinctive competencies or market-based criteria for success (Table
2.2.3). Cost Efficiency makes low price possible- a prime criterion for success. A
low-cost, high productivity operations makes efficiency possible. Minimum use
of scarce resources (labor, management, materials, equipment/facilities, and
energy) while sustaining high outputs is the key to efficient productivity.
Dependability is how well a company is able to meet specific criteria such as
delivery schedules and technical capability. Quality is the degree to which the
product or service meets customer and organizational expectations. Flexibility is
adaptability to change as business conditions change. The following Table 2.2.4
will identify different features of the cost-efficiency, dependency, quantity and
flexibility of an organization.
Table 2.2.4 Market-based criteria for success/ distinctive competencies
Cost-Efficiency
Low price  Low cost
High productivity  Labor
 Material
 Energy
Dependability
Delivery Reliable
Rapid
Availability (from stock)
Design competence Technical
capability

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Quality
High
Consistent
Flexibility
Fast introduction of new products and services
Wide product/service range

Given a specific operations mission established from the four market-based

criteria for success (efficiency, dependability, quality, flexibility) operations
managers must make choices in the following areas:

i. Choice of Process, i.e., the type, technology, and product/service

produced.
ii. Facilities, e.g., the scale, location, and focus of the facilities.
iii. Capacity, i.e., the policies governing the management of the sum
capability of all business units (the maximum production available).
iv. Vertical integration, i.e., the degree and nature of dependence from
resources purchased through production to the consumer.
v. Operations integration, i.e., the labor policies, payment methods,
systems of production and inventory control, which are key for
management control.
vi. Operations interface with other functions, i.e., the mechanism for
communicating with other functions.

The first four categories are normally recognized as long-term decisions that are
Operations managers
difficult to reverse and therefore more likely to be considered strategic. The last must link various
two appear to deal with tactical matters, with decisions that are more concerned decision areas in
with day-to-day operating matters of an organization. The operations managers operations in the way
must link various decision areas in operations in the way that best complements that best complements
corporate strategy.
corporate strategy. The organizational plans, policies, and actions within
operations should focus in the same direction and be mutually supportive. Further
quality, automation, capacity, and inventory decisions must not be made
independently. Even though individual choices may make sense on their own,
collectively they might not add up to the best result. The combinations of choices
made in all of the areas listed above represent the operations strategy of a
particular firm.

Finally the operations strategy must be changed and adapted to maximize the
market criteria for success, or the chosen markets should be changed to match
more closely to operations capability in terms of market criteria for success. This
could be done through avoiding the following activities:
• Focusing on the manufacturing performance criteria that do not match
the market criteria for success.
• Trying to produce goods in a single factory for markets with very
different criteria for success.
• Trying to meet incompatible criteria for success with in a single market.

In doing so, production manager can develop functional strategy in areas such as
finance, marketing, and manufacturing and therefore gather all the necessary
information they can to design their corporate strategy to carry out the corporate
objective.

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Operation Function Positioning Decisions

Distinctive competencies or competitive priorities of any firm may be visualized
as selecting a particular volume within a pyramid such as shown in Figure 2.2.1.
Positioning establishes the extent to which the production system will emphasize
certain characteristics in order to achieve the greatest competitive advantage.
This is a broad strategic decision that is important in guiding and coordinating
the actions of the operations.

Quality

Efficiency
Dependability

Flexibility

Figure 2.2.1: Possible positions of an operations function

The Pyramid defines the relative priorities that can be assigned to each of the
four performance characteristics. However, the portion of the pyramid that a
company management will try to occupy is a strategic decision of that firm. If
each part of a company tries to move in any direction in which that part of the
company believe a competitor is out performing the pyramid then the overall
company’s money, talents, and efforts will not be effectively expended.

Activity: Discuss why an organization can not be best on all the

dimensions of pyramid?

It is true that an organization cannot be best on all these dimensions. And if a

Organization can’t be firm tries to do so, then it will end up doing nothing well. Furthermore, when a
best on all dimensions competency exists in one of these areas, an attempt to switch to a different one
and further even if any
firm try to do so, it will
can lead to a downfall in effectiveness. A company that tries to move in several
end up doing nothing directions simultaneously will not have a distinctive competence. In other words,
well. it will not have a difference that sets it apart from its competitors so that
customer prefers to deal with it rather than with the others. Further, customers
can’t rely on a company for consistent treatment if it frequently changes its
priorities and emphasizes different characteristics.

Since a company cannot simultaneously cover all corners of the pyramid, it can
expand the range of the pyramid covered by shrinking the pyramid. The effect is
that a relatively larger percentage of the pyramid is covered, leaving less space
for a competitor to develop a distinctive competency. Numerous Japanese
companies have practiced shrinking of the pyramid in their operations. This is
through stricter quality control, resulting in simultaneous improvement in quality
and cost of repair and screening, and dependability. Multi-skilling of workers has

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improved flexibility

Environmental Scanning
Because strategy deals with broad issues and long range plans, therefore strategy
formulation is a multifaceted activity. In the process of formulating strategies,
managers must evaluate information about conditions in the company’s internal
and external environments. The key issues of these environment is discussed
below.

External Conditions
• Economic Conditions: These include the general health and direction of Factors that influence a
firm’s operation from
the economy: number of households and growth patterns in the target the external sources of
markets, current stage of the business cycle, interest rate, and that firm is known as
employment level. external environment.
• Political Conditions: These include favorable or unfavorable attitudes to
business: tariffs, foreign trade restrictions, monetary exchange rates,
political stability in nations of interest and in neighboring countries,
labor policy, fiscal and monetary actions.
• Social Conditions: Trends toward more leisure time and casual lifestyles
etc.
• Technological Conditions: These can include the rate at which product
innovations are occurring, current and future process technology and
design technology.
• Market conditions: Functions of a potential product, needs and desires of
customers, primary concentrations of present and potential customers,
possible distribution methods, potential competitors, their location their
strategies, their vulnerable points, barriers to enter into the market etc.
• Legal Environment: This includes anti-trust laws, government
regulations, trade restrictions etc.
• Competition: This includes the number and strength of competitors, the
basis of competition, and the ease of market entry.

Internal Conditions
There must be an adequate match between the key requirements of the market The purpose of internal
within which a company competes and the capabilities of the company. The reviews is to assess the
purpose of internal reviews is to assess the company’s capabilities to move company’s capabilities
to move forward when
forward when opportunities exist and to identify any weaknesses early enough to opportunities exist and
correct them, particularly if external conditions represent a threat in the area. to identify any
Internal conditions that should be evaluated include: weaknesses.

• Market understanding and appropriate marketing capabilities: Access to

markets and resources, company or product image, distribution channels
• Existing products (goods and services): These include existing products
and services, and the potential for new ones.
• Existing customers and relationships: Loyalty, existing relationships,
and understanding of customer wants and needs are important.
• Existing suppliers, distribution & delivery networks and relationships:
Dependability of suppliers, quality, flexibility, relationships, and service
are typical considerations.

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• Human resources: These include the skills and abilities of managers and
workers, special talents, loyalty to the organization, expertise, dedication
and experience.
• Current facilities, equipment, processes and locations: Capacities,
location, age and cost to maintain or replace can have significant impact
on operations.
• Available capital and financial strength: Cash flow, access to additional
funding, existing debt burden and cost of capital are important
considerations.
• Others: Patents, labor relations, maintenance of facilities and equipment.

A basic objective of evaluating internal conditions is to determine how the

company’s resources can best be used to capitalize on the opportunities or to
counteract the threats that are revealed by the external evaluation. Because
conditions change and competitive actions and reactions occur, strategy
development is a continuing activity. An operations manager must constantly
study information about the factors outlined previously, reevaluating, and
perhaps reformulating the company’s strategy from time to time.

Activity: Why are both internal and external environment conditions

equally important for designing the operations strategies? Discuss logically.

Social
Technological Conditions
Conditions

Market
Political Conditions
Conditions

MISSION
Economic Internal strengths
Conditions And weaknesses
(Current and future)

Corporate
Environmental Strategies Business philosophy
Conditions Or shared values
of decision makers

Policies and sub unit objectives

Lead to the Functional strategies and operating plans in

Accomplishment of Operations, marketing, finance, engineering etc.

Short term decisions and day to day activities

Figure 2.2.2: The desired relationship between strategy formulation and

company activities

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Figure 2.2.2 outlines the relationships among the elements and activities involved Various external and
in formulating and implementing corporate strategy. It shows that various internal conditions also
external and internal conditions influence the company’s mission (The broadest influence company’s
expression of the direction in which a company will apply its efforts). Since mission.
activities in any part of the company can and do change, the company’s strategy
must be re-evaluated regularly. Here is an example how a broad array of external
conditions can influence overall strategy.

Operations Impact of Nissan’s Strategy

Japan’s automobile producers are now • Economic conditions: Japan’s trade balance
competing in what has become an enlarged endangered because it imports 88% of its
and more competitive world car market. energy, and energy costs have multiplied in
Nissan, maker of Datsun cars and trucks, recent years. High costs of shipping coal, oil,
appears to have effected a change of and other resources to Japan and engines back
strategy in response to certain changes in to the United States.
the external environment, as outlined • Strategic decision: Produce engines in Mexico
below: and assemble pickup trucks in the United
• Social condition: High unemployment States.
among United States auto-mobile • Operation implications: Engine production
workers. workers with lifetime employment must be
• Political condition: US Congress’ under retrained and assigned to other jobs.
pressure to erect trade barriers such as Production control becomes more difficult to
import quotas and higher tariffs. coordinate when operations are scattered over
• Technological conditions: Aluminum several countries. Lead times to get engines
used in light weight, high-mileage for units assembled in Japan are longer.
automobiles requires large amounts of Larger inventories must be maintained to
energy to produce. ensure that operation will not be interrupted.

New Strategies
The modern views of organizational strategies that are rapidly gaining favor
throughout the business world are quality-based strategies and time-based
Strategies.

(A) Quality-based strategies: Quality-based strategies focus on quality in all

Quality and time based
phases of an organization. There are certain dimensions of quality that must strategies are the two
be focused on to make a success of this strategy. These dimensions are: modern views of
• Performance: the main characteristics of the product or service organization strategy.
• Special Features: extra characteristics
• Conformance: how well a product or service corresponds to the
customer’s expectations
• Reliability: consistency of performance
• Durability: the useful life of the product or service
• Perceived Quality: indirect evaluation of quality
• Service after Sale: handling of complaints or checking on consumer
satisfaction

The degree to which a product or a service successfully satisfies its intended

purpose has four primary determinants:
• Design
• How well it conforms to the design
• Ease of use
• Service after delivery

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It is important for management to recognize the different ways that the quality of
a firm’s output can affect the organization and to take these into account in
developing and maintaining a quality assurance program. Some of the major
ways that quality affects an organization are:
• Loss of business
• Liability of an organization
• Productivity
• Costs

(B) Time-based Strategy: Time-based Strategies focus on reducing the time

Time-based Strategies needed to conduct the various activities in a process. By reducing time, the
focus on reducing the costs are generally less, productivity is higher, quality tends to be higher,
time needed to conduct product innovations appear sooner, and customer service is improved. This
the various activities in
a process.
can be achieved through,
• Planning Time: The time needed to react to a threat, to develop
strategies, and select tactics, to adopt new technologies etc
• Product/service design Time: the time needed to develop and market
new or redesign products or services
• Processing Time: the time needed to produce goods or provide
services
• Changeover Time: the time needed to change from producing one
type of product or service to another
• Delivery Time: the time needed to fill orders
• Response Time for Complaints: the time needed to respond to
customer complaints about quality, timing of deliveries, etc.
Today in one industry after another, Japanese manufacturers are producing
products two to three times faster than their Western competitors.
• In projection television, Japanese producers can develop a new
television in one-third the time required by US manufacturers
• In autos, Japanese producers can develop new products in half the
time and with half as many people as the US and German
competition.

Activity: Do you think Bangladeshi operation managers need to consider

the modern views of new strategy formulation issues? Why? Justify.

Operations Strategy for Services

Goods and services differ from each other in many ways. As a result the strategy
for services should be formed keeping in mind the following strategic aspects:
• Fewer barriers: as services are often not patentable and the capital
investment is low, competitors can easily join the market
• Less proprietary technology involved: it is more people –based than
technology-based
• Costs difficult to measure: pricing is hard to compare among
competitors as there is a lot of customer involvement
• Acquisition is risky: the acquisition is mostly of people who can
leave any time they desire unlike that of machineries.
• Location is important: a good location is a key strategic move for a
service-firm

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• More flexible: as it is people-based and can vary according to the

wishes of the customer.

Summary
Operations strategy is a collective pattern of coordinated decisions for the
formulation, reformulation, and deployment of the organization’s resources.
These decisions provide a competitive advantage in support of the overall
strategic initiatives of the firm or strategic business unit. Strategic planning is the
process of thinking and considering through the current mission of the
organization and the environmental factors it is facing and setting guidelines for
tomorrow’s decisions and results accordingly. Therefore, for the success of an
organization the operation managers must make choices in the areas of facilities,
capacity, choice of process, vertical integration, operations integration and
operations interface with other functions.

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The cosmetic manufacturer

The top management of a cosmetic manufacturing company had formulated a
Case mission to increase their market share significantly. It involved a five-year plan
Analysis with an innovative product: stay-on lip gloss. The production department
informed management that it would take at least one year to make a trial batch to
release in the market. The Head of Finance was anxious about the huge capital
input involved in buying the technology required. Five years after their product
was in the market, but proved a failure. The demand for their product had not
been what they had anticipated, and market share had not increased. Their main
competitor had introduced a product that had diverted all attention from theirs,
and their promotional endeavors had failed miserably. Due to the huge capital
already invested, they were unable to stop production, and cut their losses.

Question:
1. What was the problem with top management’s mission? How should they
have formulated their strategy?

Duke’s Business Plan

As the business team sits at their round conference table, Rita brings up an issue
now near to her heart. She has just become engaged to Duke, who works for
Case
Pepsi Co. Duke is worried about his new job. Coke’s CEO Robert Goizueta has
Analysis created more wealth for shareholders than any CEO in history with the single
focused strategy of making Coke the domestic and international drink. On the
other hand, Pepsi is a conglomerate with domestic and international drinks;
restaurants such as Sonargaon, Sheraton, Sundarban, and Pizza Hut etc; Bottling
operations. While Coke has been focused on selling Coke, Pepsi has diversified,
pouring billions of dollars into other capital-intensive business. Some think Pepsi
has lost the cola wars, both in Bangladesh and overseas. Duke wants the team’s
advise about what strategic help he can give his new boss.

Questions:
1. Taking the steps in the strategic process in order, what advice do you think
the team should give Duke?
2. What factor do you think have led Pepsi to choose its strategy instead of
Coke’s strategy?
3. What strategic planning changes would you recommend to Pepsi and why?

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Discussion questions
1. Describe how distinctive competencies relate to strategy formulation.
2. It has been said that a typical Japanese automobile producer is more efficient
than its U.S. counterpart. What are the possible explanations, assuming that
U.S workers are as hardworking as Japanese workers?
3. Explain and discuss the concept of positioning. Why would a company not
want to keep changing to confuse its competition?
4. How might operations strategy of a local business respond to the imposition
of import tariffs on foreign substitutes?
5. If you were to open a fast-food shop in a well-known shopping mall, how
would you plan your operations strategy?
6. Do you think that a market based view of strategic planning is crucial to
competitiveness? Why?

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Lesson three: Productivity Quality Technology

Lesson Objectives
After completing this lesson you will be able to:

Explain the relationship between productivity and operations
management

Justify the importance of production quality

Discuss the use of technology in the production process

Productivity
Productivity can be Efficiency, productivity, and performance are terms we tend to use
defined as the interchangeably in discussing the behavior and achievement of production.
relationship between Efficiency and productivity refer to a ratio of outputs to input. Productivity can
inputs and outputs of a be defined as the relationship between inputs and outputs of a production system.
production system.
If more output is produced with the same inputs productivity is increased.
Likewise, if same output takes fewer inputs productivity is also increased.
Performance, on the other hand, is a broader term incorporating efficiency and
productivity in overall achievement.

For a firm, productivity is very important for several reasons: as a firm’s

productivity improves, the firm’s ability to compete in the market improves,
leading to sustained economic growth. With increased productivity, less inputs
are needed for a given amount of output, which minimizes the production cost or
offsets the affects of inflation. This is possible because here we get more output
from the same amount of input which is either for improved technology or
decrease in waste age rate or as a result of an organization’s strategy. Improving
productivity is more important than any other setting in the firm or industry. The
reasons behind this are:

• Productivity permits better salaries and wages and these in turn are the
bases for a better standard of living.
• Improved productivity keeps the firm afloat and competitive in the
market.
• Productive people are happy people. They are satisfied; they find their
reward in their own effort.

Improving productivity Changes in productivity are often calculated by comparing ratios of output per
is more important than worker-hour utilized to produce the product or service or output per unit of labor
any other setting in the and capital employed to produce the product or service. If only labor input is
firm or industry. measured, a change in the ratio may be misleading because the change in
productivity may have resulted from a change in the amount of equipment per
worker rather than increased worker efficiency. Therefore the firms’ productivity
will be:
Outputs
Pr oductivity =
Labor + Capital + Materials + Energy

The term total factor productivity is used when the ratio is based on both capital
and labor inputs. The term labor productivity is sometimes used if the ratio refers
to labor hours as the only input. For example if a firm uses the inputs of 200 hour

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labor and 100 hours of machine and got output of 3,00,000 units, then the
multifactor productivity of the firm will be:

3,00,000
Multifactor Productivity = = 1000 units per hour
200hr + 100hr
Quality
One reason that the competitive position of a firm can cost is it the quality of A product must be
goods and services does not meet the customer’s expectations. Quality, adequate enough for the
nowadays, is viewed as not only meeting customer satisfaction but rather application that the
exceeding it. From the customer’s perspective an important part of the quality of customer has in mind.
a good or service is fitness for his or her intended use of it. A product must be
adequate enough for the application that the customer has in mind. There is a
clear relationship between quality and productivity. Generally, when quality
increases, so will productivity. This is mainly because of the elimination of
waste, which ultimately reduces the input.

Improving quality is one important way to maintain a competitive position in the

When quality is
market. Quality can be promoted to customers and employees. Consumers want emphasized & improved,
quality products and services, and employees at all levels in the organization like waste is decreased,
to be associated with a winner. From an economic perspective, when quality is materials are not thrown
emphasized and subsequently improved, waste is decreased, materials are not away, hours are not
wasted reworking
thrown away, hours are not wasted reworking products and operations costs are
products and operations
reduced. At the same time, the customers receive products and services that are costs are reduced.
of their satisfaction. Moreover, prices can be lowered to share this productivity
gain with customers, thereby stimulating an increase in the firm’s market share.
Therefore to achieve good quality, a company must address three major areas:

• Quality of design: The product or service must be designed to be of at

least the minimum appropriate grade for its use,
• Quality of conformance: It should conform to the standards of the design,
and
• Quality of performance or service: Consumers should receive the
necessary training and service support so that their use of the product is
satisfactory within reasonable expectations.

Companies compete for the consumers’ business on several bases. The three
most frequently recognized factors that influence a potential purchaser are: price,
quality, and availability. When competing products are available, the customer
mentally performs an evaluation of the price quality trade-off. He or she may not
calculate an explicit cost benefit ratio, but the concept is very much the same.
The basic question is that how much service do I get for my money? A company
then has to provide a competitive level of quality at a competitive price in order
to have the necessary sales revenue to pay its expenses and leave a profit. The
costs that a company incurs because of quality activities or because of the lack of
quality can be divided into four segments. These are,
• Costs of prevention: This cost relates to attempts to prevent defects from
occurring. Costs for quality planning, process control, and quality
training and work force development.
• Cost of Appraisal: This cost relates to inspection, testing and other
activities intended to uncover defective products or services, or to assure

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that there are no defectives. Inspection of purchased items, inspection,

maintenance, and calibration of test and inspection equipment.
• Cost of internal failure: These are costs for failures that are discovered
during the production process. Internal failure occurs for a variety of
reasons, including defective material from vendors, incorrect machine
settings, faulty equipment, incorrect methods, incorrect processing,
carelessness and faulty or improper material handling procedures. The
cost of internal failure includes scrap, rework, revenue lost when
products must be sold as seconds etc.
• Cost of external failure: These are costs for failures that are discovered
after delivery to the customers. External failure causes are defective
products or poor service that go undetected by the producer. Resulting
costs include warranty work, customer service, product liability, product
recalls etc.

It is notable that among the above four segments the first two segments are the
costs to control quality and the last two segments are the costs of failure to
control quality.

Technology and Its Adaptation

Technology is the scientific expertise needed for the operations process, building
Technology is an
emerging factor of
of labor, land, capital and management. In a conversion process technology
economic development. includes the sophisticated level of modified and scientific methods used in plant,
equipment and skills. A soap manufacturing operation, for example, features a
highly mechanized, capital intensive, efficient production process with
specialized equipment. There is a growing assertion that economic growth is
becoming dependent on technology. This leads to the need for continuous R&D
(research and development) in technology management in order to manage
increasingly complex technological innovations in an ever-challenging
competitive global environment. Though the economists have long considered
mostly two causes – capital & labor - for any economic development, they are
coming around to acknowledging technology as the third major cause. It is
because capital and labor are the two primary factors needed for all other factors
of production, and technology is the accomplishing mean to amalgamate all these
factors into production.

Therefore, the urgency and the significance of managing technological change to

achieve sustainable development can hardly be overemphasized. As human
societies have gradually evolved from the sole-dependence on mother nature to
more and more reliance on man-made technology therefore, revolutionary
technological change has become the norm of socio-economic development.
However the capacity to conform to the technological change is not the most
important quality for development. It rather includes these three capacities:
• Capacity to raise serious questions about the way organizational activities
are done
• The assumptions upon which operations decisions are based; and above all
• The organization capacity to take risks

In an age when rapid change is the norm, the developing economies should be
able to handle transition on a continuous basis. Moreover, since these changes are
driven by technology, the ability to mange technological change depends on the

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use of appropriate measures of the organization and its management.

Misconception About Appropriate Technology in Developing Countries
Let us note here a commonly held misconception regarding technological Appropriate technology
appropriateness in developing countries. Since no technology is the be-all end– merely refers to the
all for any situation, appropriate technology merely refers to the appropriateness appropriateness of
choices made for actual
of choices made for actual use. In fact, appropriateness is not to inherent any
use.
technology. Appropriateness is intrinsically objective, and situation and time
specific. There is a feeling among some government officials that labor-intensive
and less sophisticated machinery are always appropriate for developing countries.
However with less skill (humanware2) and less sophisticated physical facilities
(technoware3) global market competition is not possible. Therefore, simply
equating appropriate technology with labor-intensive technoware may result in
sub-optimization and lead to market failure for any growing firm or industry.

Misplaced Reliance on Technology Transfer

Another interesting point made here for those who advocate the sole reliance on Technology transfer is
technology transfer by developing countries is that technology is a human-made not just know-how
resource and it is mostly owned by the private enterprises of the developed licensing transfer. It
countries. But most important by technology transfer is a business deal between will be successful if
the buyer can use the
the producer (or supplier) and the user (or buyer). Now let us observe the pattern technology to compete
of technology flow in the free world under normal circumstances. Businessmen in the global market.
know that only non-state-of–the art4 technoware are sold in the international
market at prices determined by the relative bargaining power. Critical info-ware5
(sometimes known as trade secrets) is closely guarded by the owner of
bargaining power. And orgaware6 cannot be transplanted without socio-cultural
adaptation. Therefore, technology transfer is not just “know-how licensing” and
certainly not an automatic byproduct of foreign investment. Technology transfer
can be called successful if the buyer can use the technology to compete in the
global market.

Reverse Technology Life Cycle in Developing Economies

By necessity, enterprises in late developing economies may follow the reverse
order of the technology life cycle, i.e., slowly progressing from the end to the
beginning on the basis of a progressive set of strategies. Some of the strategies
are,

Technology extender strategy: Use of out dated and imported, but
mature technologies by small-scale start-up firms.

Technology exploiter strategy: Selective use of modern, standard
technologies by medium size joint venture firms.

Technology follower strategy: Adaptation and use of licensed
technology and creative imitation by large firms.

2
Humanware or know-how technology consists of the skills needed to realize the potential of
technoware.
3
Technoware or physical technology refers to both material processing subsystem and information
processing subsystem that may be built into the physical technology.
4
meaning only those which does not threaten the competitive edge of the seller
5
Inforware or know-why technology represents the accumulated knowledge needed to realize the
full potential of the technoware, humanware and orgaware.
6
Orgaware or procedural technology refers to the support net of principles, practices and
arrangements that govern the effective use of technoware by the humanware - which may be
viewed in terms of work convention, organization, work facilitation, work evaluation and work
modification.

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Technology leader strategy: Use of own state-of–the-art technologies

for global market competition by high technology firms.

Begin Technology
-ning Extender
Strategy

Technology
Technology Exploiter
Leader Strategy
Strategy
Technology
Follower
Strategy

= Technology life cycle for developing countries

= Technology life cycle for late developing countries

Figure 2.2.3: Technology life cycle

It is important to note that while acquiring new types of technological capabilities

in successive stages, all existing capabilities have to be further strengthened
through component upgrading and continuous learning. The Figure 2.2.3 shows
the close interaction between developing and late developing economies.

Summary
Technology is the scientific expertise needed for operation process building of
labor, land, capital and management. In a conversion process technology includes
the sophisticated level of modified and scientific methods used in plant,
equipment and skills. Productivity can be defined as the relationship between
inputs and outputs of a production system. If more output is produced with the
same inputs productivity is increased. Likewise, if same output takes less input
productivity is also increased. Quality is the customer’s perceptions of degree of
excellence exhibited by product services. It makes the customers satisfaction
high and the product consist. Three major aspects of quality can be summarized
as, quality of design, quality of conformance, and quality of performance or
service.

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Tipon TV in Bangladesh
Tipon TV has been manufacturing television sets for the last twenty years in
Bangladesh. At one point it was the market leader among the local Case
manufacturers, and Tipon TVs were reputed to be durable, and their performance
Analysis
met the expected standards. However, today their TVs are outdated in terms of
design and features offered. Productivity has not increased with time, and the
technology used is outdated and labor-intensive which means a large number of
low-skilled workers are employed. Their machinery was imported from abroad,
and for many years now overhauling has been delayed as profits have dropped
and funds are short. Buying new capital-intensive technology was considered but
the idea was dropped because the cost involved was enormous. With the advent
of the free market economy, foreign televisions that offer better quality and
competitive prices, demand has been dropping faster.

The board of directors of the company has hired a new managing director to
bring in new ideas and innovations as a last-ditch attempt to rescue the sinking
ship. She recommended to the board that a loan be used to finance the purchase
of newer, capital-intensive technology, revamp the design and features of the
television set. This would have a two-fold effect, resulting in both improved
quality and productivity. As this involved redundancy of a large section of the
workers, some of the directors had qualms about that. When the objection that
the unskilled labor force would not be able to work with new, sophisticated
technology was raised, the MD’s solution was to provide training to some
workers to enable operating the new equipment.

Question:
1. Do you think the new MD’s proposal is a viable one or not, keeping in mind
the Bangladesh context? Justify your answer.

Case: Haji’s Biriani

HAJI’s BIRIANI, a house of quality fined rice mixed with beef, wants to extend
its service and is considering broadening its menu to offer Kabab (roasted meat)
and Shahi Halim (a kind of porridge made with beans, meat, etc) in addition to its
Case
only special menu Biriani. It has been running its business by selling Biriani for a Analysis
long time, and it has got enough name and fame and superiority over other in this
sector. Though it has a great demand everyday. It does not cook Biriani more
then two haris (Large rounded vessel used for cooking) per day only to maintain
its quality and taste. Haji thinks that the new menus will not be made in large
volume, as is its standard item, and the owner, Haji is therefore evaluating
whether or not the new menus will be introduced while there exist a number of
quality restaurants and Kabab house offering them.

He is also evaluating decisions regarding whether or not the new menus will be
prepared and served ahead of time. If he chooses not to prepare Kabab and Halim
ahead of demand, it will move away from the dependability –service
characteristic for these items. If these items are prepared ahead and held, these

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might not appear so fresh and be so tasty. This option would cause the company
to move away from a high – quality emphasis. If the items are prepared at some
rate of reasonable expected demand and thrown away if not demanded Haji’s
cost performance will suffer. On the other hand, concentration on the new items
may demise his existing quality and demand of Biriani.

Questions:
1. Visualize yourself in the position of Haji. Now how will you manage the
operations features to remain consistent with its position?
2. Do you thing that you should apply high technological support for his
operations? If yes, then do you think that it can affect his quality of products?
Why? (Given that existing operations are performed manually)
3. As a manager of Haji, do you support this diversification? Justify your
answer.

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Discussion questions

1. What are the primary reasons for high productivity?

2. If the firm accepts quality as a strategic variable for improving operations,
what result might the firm expect?
3. Relate quality and productivity.
4. How should the operations strategy of companies in developing nations use
technology as a competency?
5. What is unusual about the technology life cycle in developing economies?
6. “In fact, appropriateness is not inherent to any technology.” Do you agree?
Justify.

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