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

1. Operations Strategy Leeds School of Business University of ColoradoBoulder, CO Professor Stephen Lawrence

2. Summary ofOPERATIONS MANAGEMENT

3. Operations – 80-90% Hidden

4. Transformation Definition INPUTS OUTPUTS Materials Goods Labor Transformation Processes Capital Services Knowledge

5. Cost Operations Marketing Added Value for Customer Added Value Model Finance Accounting Profit! Information Systems People and Organization adapted from Porter, Competitive Advantage, Free Press, 1985

6. The Value Equation

7. Evolution ofOperations Strategy

8. Operations in the 50’s & 60’s • 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, 1950’s • Operations largely ignored, not “strategic”

9. “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

10. “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 factory’s responsibilities • Limit overhead, focus on production “The Focused Factory,”Wickham Skinner, Harvard Business Review, May-June 1974

11. “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

12. “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

13. “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 • Don’t 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

14. 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

15. 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

16. Implementing Operations Strategy: Four Views

17. Implementing Operations Strategy • Strategy as Evolutionary Search • Strategic Differentiation • The Balanced Scorecard • Business Performance Excellence

18. Strategy as Evolutionary Search

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

20. The Origin of Strategies • “Evolution across a population is nature’s trick for mastering uncertainty. Businesses can use it to.” • Complex systems exhibit • Emergent patterns of behavior • Punctuated equilibrium • Path dependence • Can’t rely on patterns and predictions Beinhocker, “On the origin of strategies,” The McKinsey Quarterly, Number 4, 1999.

21. 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 don’t work (extinction) • Fitness landscape changes constantly Beinhocker, “On the origin of strategies,” The McKinsey Quarterly, Number 4, 1999.

22. “Rugged Fitness Landscape” Beinhocker, “On the origin of strategies,” The McKinsey Quarterly, Number 4, 1999.

23. 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.

24. Strategic Differentiation

25. Treacy and Wiersema, Discipline of Market Leaders, 1997

26. Models for Strategic Differentiation • Operational Excellence • Low/Best Total Cost • Best Total Solution • Customer Intimacy • Product Leadership • Best Products / Product Innovation

27. 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

28. Operational Excellence • Focus on Productivity & Price • Quality means consistency, conformance, and reliability • Timeliness means on-time delivery

29. 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

30. Best Total Solution • Focus on Timeliness & Flexibility • Timeliness means delivering on-demand • Flexibility means “the customer is always right” • Quality means service

31. 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

32. Product Leadership • Focus on product Innovation • Quality means performance, features, and aesthetics • Timeliness means rapid new product introductions and planned obsolescence

33. 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

34. Differentiation Life Cycle ProductLeadership Best TotalSolution OperationalExcellence

35. Balanced Scorecard

36. Kaplan & Norton, The Balanced Scorecard, 1996.

37. Balanced Scorecard FinancialMeasures How do we lookto shareholders? How do customerssee us? CustomerMeasures InternalBusinessMeasures At what mustwe excel? Innovation &LearningMeasures How to improve & create value? Kaplan and Norton, “The Balanced Scorecard – Measures that Drive Performance,” Harvard Business Review, Jan/Feb 1992.

38. 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.

39. 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.

40. 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.

41. 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.

42. Balanced Scorecard How do we lookto shareholders? FinancialMeasures How do customerssee us? VisionandStrategy CustomerMeasures InternalBusinessMeasures At what mustwe excel? Innovation &LearningMeasures How to improve & create value? Kaplan and Norton, “The Balanced Scorecard – Measures that Drive Performance,” Harvard Business Review, Jan/Feb 1992.

43. Business Performance Excellence (BPE)

44. Dr. Jeff Luftig, Leeds School of Business

45. 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 Purpose of Policy Deployment:Establishing the ‘Point of the Compass’

46. 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!

47. Rules for Vision & Mission • Never state anything that you do not intend to measure, and subsequently allocate resources to achieve. • If it is critical to your organization, always state it. • Never state anything that makes the management team look foolish.

48. Metal Surface Finisher

49. 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! Steps of Policy Deployment

50. Models for Strategic Differentiation • Operational Excellence • Low/Best Total Cost • Best Total Solution • Customer Intimacy • Product Leadership • Best Products / Product Innovation