operations management chapter 2

Capabilities: Strengths and Limitations of Supply Chain Operations

capabilities Unique and superior operational abilities that stem from the routines, skills, and processes that the firm develops and uses.

business unit , strategic planning continued

Because products and markets differ across business divisions, a separate management team (usually headed by a president or vice president) is usually needed to run each of these semi-independent organizations, or strategic business units (SBUs). An SBU can be organized along product, market, or geographic dimensions. Business unit strategy essentially deals with the question, "How should our business unit compete?" To answer this question managers make choices regarding what customers and market segments they will deem critical, what products to offer, and specifically how they will create advantages over the business unit's competitors. These choices collectively form the business model that the unit will pursue. There are numerous types of business models • . For example, long ago Gillette developed the "razor and blades" business model—give away the razor but make your money on the replacement blades. • Many businesses follow this same type of model (printers, industrial equipment). Dell successfully applied the "direct sales" business model in computers—sell computers directly to the end consumer. A "loyalty" business model rewards customers for continuing to deal with the firm. This model has been widely implemented in the airline industry (through the frequent flier program) and in the retail trade (e.g., as in Best Buy's "Reward Zone" program). • Changes in technologies, competitors, and markets can at the same time destroy the viability of an existing business model while giving rise to new ones. Consider, for example, how customers' growing concerns over sustainability issues have opened up the possibility of new business models that offer organic and eco-friendly products. These kinds of changes make it important for operations and business strategy managers to continually evaluate their existing business models and possible business model innovations.

innovation

Both radical and incremental changes in process and products. Innovation refers to both radical and incremental changes in processes and products. Especially in highly industrialized countries, innovation is an important way to create new demand. Through the creation of new and improved products, firms can appeal to new market segments, or take away business from competitors. Innovation is a response to emerging customer needs, or it can even be a way to create new needs. For example, with the creation of the iPod, Apple combined existing technologies in a way that created a new business for selling online music and other content. Traditional views of innovation tend to distinguish between product innovations and process innovations. In reality, product and process innovation are usually interrelated. Product innovations sometimes arise from process innovations, and process innovations (at least incremental ones) are usually required to support any new product innovation. Accordingly, operations managers located in various functions throughout the supply chain typically have two sets of innovation-related priorities: support product innovation and drive process innovation. In companies that pursue a low-cost strategy, most innovation tends to be incremental in nature, whereas technology-leading companies tend to pursue more radical product and process innovations. It is important to realize that process innovations can be technological or organizational in nature. Operations managers are always looking for new technologies to enhance their capabilities. However, organizational innovations can also be effective in creating new efficiencies or new market opportunities. IKEA provides a good example of a company that has developed a strong value proposition by changing the organizational relationships in the supply chain that affect how its products are stocked and shipped (see the Get Real box above).

message table 2 - three

The first four decision categories presented in Table 2-3—capacity, facilities, technology, and supply chain network—are structural in nature. They affect strategy and the physical operations management system. Once made, decisions in these areas act as constraints, determining what the operations management system can and cannot do well. Altering these decisions often requires significant investments and lots of time—often years. The remaining four decision areas—workforce, production planning and control, product/process innovation, and organization—areinfrastructural in nature. Decisions in these areas determine what is done, when it is done, and who does it. The decision areas are closely interrelated. For example, decisions regarding the supply chain network also affect the type of information technology that must be in place, how activities are scheduled, and how people are recruited and evaluated. Because these areas are interrelated, managers who make a decision affecting one area must consider the impacts of the decision on the other areas. Equally important, decision makers must consider how operations decisions affect decisions in other areas such as marketing, finance, and human resources. Table 2-3 indicates some of the other functional areas likely to be affected by each of the decisions in operations management.

Once managers have established the objectives and goals of operations strategy, they must convert them into operating realities. Strategy deployment consists of two interrelated activities:

Execution—to carry out plans and initiatives in order to deliver the realized value to customers. Feedback/measurement—to assess, communicate, and manage performance in ways that capture lessons learned and focus attention on areas needing improvement.

corporate strategic planning

Corporate Strategic Planning Describe how operations strategy fits within a firm's overall strategic planning process. Many firms are involved in more than one business. For example, General Electric operates more than 20 diverse businesses, from aircraft engines to financial services. Corporate strategic planning addresses the portfolio of businesses owned by a firm. Of the three levels of strategic planning, corporate strategic planning is broadest in scope and the least constrained. Decisions made at this level limit the choices that can be made at lower strategic planning levels. Essentially, a corporate strategy communicates the overall mission of the firm, and identifies the types of businesses that the firm wants to be in. For a large, multidivisional firm, key decisions in corporate strategy address what businesses to acquire and what businesses to divest. Corporate strategy typically covers a long time horizon, setting the overall values, direction, and goals of the firm as a whole. It also establishes how business performance will be measured and how risks will be managed

product related competitive priorities Quality Timelessness Cost

How customer's problem is 'solved' Quality: fitness for consumption in terms of meeting customer needs & desires Timeliness: delivery or availability when customer wants Cost: expenses incurred is acquiring or using the product

The SCOR model identifies performance metrics for each of these dimensions. Figure 2-6 shows level 1 metrics along with examples of actual and desired levels of performance for a given supply chain. Note that Figure 2-6 also includes metrics addressing shareholder concerns such as profitability and return on assets.page 44

One of the objectives of the SCOR model is to provide a framework for benchmarking and for deploying strategy. Figure 2-6 illustrates the results of a benchmarking analysis with the data provided in the right-hand columns. The data indicate the level of performance necessary to be on a par with the industry middle performers, as well as levels required to gain differential advantage. The data in the right-most column indicate the impact of improvement in a given performance metric, either on revenues, costs, or investments. This type of analysis could help partners in a supply chain to plan and prioritize operational improvement initiatives in accordance with an overall business strategy.

Feedback/Measurement: Communicating and Assessing Operations Strategy

Performance measurement plays very important roles in operations strategy. 1. First, performance measures communicate strategic intentions, as formulated at the corporate/SBU/functional level, to operational personnel. 2. Second, performance measures control operations. By establishing metrics, a performance measurement system establishes how performance is measured, the standard against which performance is to be compared, and the consequences of exceeding or not meeting the standard. In doing so, performance measures tell workers what things they need to do well, and how well they need to do them. In these ways, performance measures help to ensure alignment between the actions of operations managers and the objectives stated in corporate/SBU/functional strategies. Different functional groups tend to measure performance in different ways. For example, finance and top managers look at performance using financial measures (e.g., return-on-sales, asset turnover); operations managers look at performance using operational measures (e.g., lead time, quality, cost). Consequently, performance measurement must include a mix of financial and operational measures. In the following sections, we examine three different measurement approaches frequently used in operations strategy.

quality

Quality A product's quality is its fitness for consumption by the customer who bought it. It is an assessment of how well the customer's expectations are met. Some dimensions of quality are often viewed by customers as minimum requirements (order qualifiers) for most products . For example, poor conformance quality (many defects) is not tolerated in most markets. At the same time, superiority in other dimensions of quality can significantly differentiate a product. For example, a well-known brand can create a perception of quality that differentiates a product. Firms that produce high-quality products have many advantages including improved company reputation and easier selling, the elimination of time-consuming activities and costly resources required to correct quality-related problems, and employees who are motivated by the knowledge that they produce great products.

Process-Related Competitive Priorities In addition to managing for cost, timeliness, and quality, operations managers place priorities on longer-term initiatives affecting areas such flexibility, innovation, and sustainability.

While product-related competitive priorities focus on the outcomes that customers experience directly, process-related competitive priorities pertain to how supply chain operations are run over time. In addition to managing for cost, timeliness, and quality, operations managers place priorities on longer-term initiatives affecting areas such as flexibility, innovation, and sustainability. Capabilities developed in these areas contribute to supply chain operations' abilities to create new solutions and to respond effectively to changes in technology, competition, and the overall operating environment.

corporate strategy

corporate strategy Determines the overall mission of the firm and the types of businesses that the firm wants to be in.

supply chain operational reference model score

score A model for assessing, charting, and describing supply chain processes and their performance.

business unit , strategic planning SBU strategic business unit Business model

strategic business unit The semi-independent organizations used to manage different product and market segments. business unit strategy Determines how a strategic business unit will compete. business model The combination of the choices determining the customers an SBU will target, the value propositions it will offer, and the supply chain/operations

The balanced scorecard approach can be used as both a strategic planning tool and a strategy deployment tool. That is, it provides a mechanism by which focused short-term plans and improvement initiatives are aligned with long-term strategic objectives. As a framework for translating strategy into operational terms, the balanced scorecard helps to:

Set direction and communicate specific objectives and goals. Define measures that indicate degree of achievement of specific objectives. Determine the relative importance of the targets of opportunities for improvement. Maintain consistency and alignment between the corporate-level objectives and the operational initiatives, and the objectives/initiatives and strategic objectives and annual goals. As Figure 2-5 suggests, the balanced scorecard helps to create a cycle of planning, action, assessment, and feedback. It also prevents management from focusing on one area (e.g., financial performance) to the detriment of the other three areas. To succeed financially, the firm must focus on serving its critical customers through appropriate processes. It must also invest in the future because what works today may not work in the future.

balance scorecard page 42

balance scorecard An integrative approach for developing strategic, organizational-level metrics. Unlike the SPM, the balanced scorecard encourages the use of a mix of financial metrics and nonfinancial, operational metrics. The balanced scorecard seeks to integrate these various metrics into a meaningful whole, creating a strategic framework for action. The balanced scorecard approach assumes that success is based on balanced management of activities in four major areas: financial, internal business processes, learning and growth, and customer satisfaction. In each of these areas, metrics should address a central question (see Figure 2-5). For each question, the balanced scorecard approach requires the development of objectives, measures for each objective, target performance levels for each measure, and planned initiatives for reaching each target.

operations strategy

operations strategy, which is a set of competitive priorities coupled with supply chain structural and infrastructural design choices intended to create capabilities that support a set of value propositions targeted to address the needs of critical customers. Strategic decisions define the competitive objectives of an organization, establishing both the specific performance targets and the means by which the targets will be achieved.

strategic profit model pg43

strategic profit model A model that shows how operational changes affect the overall performance of a business unit. Also known as the DuPont Model, the strategic profit model (SPM)shows how income and balance sheet data are interrelated, and how operational changes affect the overall performance of a business unit. Thus, the SPM converts operational changes (often measured in time, defects, labor hours, etc.) into financial impacts (measured in dollars and returns). As Figure 2-3 shows, the SPM focuses on return on assets (ROA), a metric that indicates how profitably a firm uses its assets. ROA is calculated by multiplying the net profit margin (defined as a percentage) by asset turnover. The net profit margin measures the percentage of each dollar that is kept by the firm as net profit. The asset turnover measures how efficient management was in using its assets. For example, an asset turnover of 4 indicates that for every $4 of sales, management had invested only $1 in assets. The net profit margin and asset turnover capture different aspects of performance. Net profit margin is influenced by issues such as sales volume, operating costs, and expenses. Asset turnover reflects issues such as the amount of inventory needed (a key concern of operations managers, and one of the major assets controlled by operations). In general, the higher the ROA, the better the level of performance. The SPM is useful for evaluating both operational and marketing-based plans and actions, and answering "what-if" questions such as: What if we reduced fixed expenses by 10 percent? What would be the overall impact on ROA? To answer this question, we would enter the dollar values of operational changes in the categories shown on the right side of the SPM. The calculations in the SPM then reflect the impacts of these changes on financial measures shown on the left side of the SPM (which are of interest to top managers). Consider the following example of this type of analysis.

Value Propositions and Competitive Priorities value proposition

value proposition is a collection of product and service features that is both attractive to customers and different than competitors' offerings. To attract critical customers, the firm must formulate and implement a value proposition, a statement of product and service features that the firm offers to its customers. A value proposition needs to be both attractive to customers and different from what is offered by the firm's competitors. For example, Walmart's value proposition has been to offer everyday low prices on a wide variety of products. The value proposition is critical because it not only defines how the firm competes, it also determines the types of products that the firm will (and will not) offer.

cost

The expenses incurred in acquiring and using a product. It is well known that people like to get things cheaply but they do not like "cheap things." This statement describes both the attraction and the problem of emphasizing cost as the firm's major source of value. Customers typically want at least the same product performance for a lower cost, not simply less for less. A competitive priority placed on cost usually treats certain dimensions of quality and timeliness as givens and focuses on reducing cost. Different types of costs may be more or less important to customers, depending on the product type. Purchase cost (price) is usually most important for consumer goods. However, maintenance and operating costs are often much more important for customers buying long-life items such as industrial machinery. Disposal costs are becoming more important considerations for durable goods (cars, washing machines) due to environmental concerns.

timelessness leadtime Time-to-market Order to delivery leadtime

leadtime The amount of time that passes between the beginning and ending of a set of activities. time-to-market The total time that a firm takes to conceive, design, test, produce, and deliver a new or revised product for the marketplace order to deliver leadtime the time that passes from the instant the customer places an order for a product until the instant that the customer receives the product Timeliness Dimensions of product timeliness, the degree to which the product is delivered or available when the customer wants it, can serve as order winners or qualifiers, depending on the situation. On-time delivery of a product is in many cases an order qualifier (or order loser, if the product is late). Similarly, availability of a good or service is usually a qualifier. For example, grocery store customers expect products to be on the shelf. On the other hand, lead time, the amount of time that passes between the beginning and ending of a set of activities, is often an order winner, especially for nonstandardized products. There are two types of lead time that are typically important. The first, time to market, is the total time that a firm takes to conceive, design, test, produce, and deliver a new or revised product for the marketplace. This lead time is a once-in-product-life-cycle event. That is, a firm may spend 18 months designing a car and getting the supply chain ready for production, but once production has been ramped up and the cars begin rolling off the assembly line, there is no significant design product lead time needed to make subsequent copies of that car. Time to market can be an order winner if the new product offers features or performance that is not available in other products. The other type of lead time is order-to-delivery lead time for an existing product. This encompasses the time interval starting at the moment that the customer places an order for a product, including the time required to place and fulfill an order, and ending at the moment that the customer takes delivery of the product. In services, customers often judge the value of a service largely on the operation's order-to-delivery performance. For example, a dining experience is marred by slow service, or it is irritating when a salesperson seems to have gotten lost in the back room. Order-to-delivery lead time is also important for highly customized, made-to-order products; a piece of customized jewelry, for example.

The SCOR model includes more than just metrics; it provides tools for charting and describing supply chain processes. It also describes supply chain management best practices and technology. However, we will focus only on the metrics portion of the model. The SCOR model identifies basic management practices at different levels of operation. For example, "level 1" processes include plan, source, make, deliver, and return. One of the basic tenets of the SCOR model is that metrics should cascade hierarchically from one level to the next. At each of the levels addressing the supply chain, SCOR addresses five basic dimensions of performance. They are:

• Delivery reliability: The performance of the supply chain in delivering the correct product, to the correct place, at the correct time, in the correct condition and packaging, in the correct quantity, with the correct documentation, to the correct customer. • Responsiveness: The velocity at which a supply chain provides products to the customer. • Flexibility: The agility of a supply chain in responding to marketplace changes to gain or maintain competitive advantage. • Costs: The costs associated with operating the supply chain. • Asset management efficiency: The effectiveness of an organization in managing assets to support demand satisfaction. This includes the management of all assets: fixed and working capital.

Assessing Customer Wants and Needs It is important for operations managers to know what product features and delivery terms critical customers consider important, what they are willing to pay, and what they consider acceptable. These product-specific traits can be classified into one of three categories: order winners. Order qualifiers. Order losers

• Order winners. These product traits cause customers to choose a product over a competitor's offering; for example, better performance or lower price. These are traits on which the operations management system must excel. • Order qualifiers. These are product traits such as availability, price, or conformance quality that must meet a certain level in order for the product to even be considered by customers. The firm must perform acceptably on these traits (i.e., the products must meet certain threshold values of performance), usually at least as well as competitors' offerings. • Order losers. Poor performance on these product traits can cause the loss of either current or future business. For example, when an online retailer fails to deliver an order in a timely manner, a customer might cancel the order and refuse to place orders in the future. • In reviewing these categories, there are several factors to remember. First, order winners and order qualifiers form the basis for customers' expectations. • Order losers, in contrast, result from customers' actual experiences with the firm and its operations management processes. They represent the gap between what the firm delivers and what customers expect. • Second, order winners, order qualifiers, and order losers vary by customer. An order winner to one customer may be an order qualifier to another. • Third, these traits vary over time. An order winner at one time may become an order qualifier at another point in time.

customer and critical customer

customer Parties that use or consume the products of operations management processes. critical customer : A customer that the firm has targeted as being important to its future success. Critical Customers The starting and ending point for effective and efficient supply chain operations is the customer. As defined in Chapter 1, customers are parties that use or consume the products of operations management processes. A customer is not necessarily the end user. For example, a store manager or purchasing agent who buys products for resale is a kind of customer . Almost all firms deal with multiple customers having varied desires and needs that change over time. Hence, each firm has to identify its critical customers. Firms deem certain customers to be critical for a number of reasons. For example, a critical customer may be responsible for the largest current or future sales of the firm, or it may be the one with the highest prestige. In the automotive industry, Toyota is often such a customer because of its very high quality and performance standards; a supplier working with Toyota is often viewed as a top rated supplier.

Maintaining the Fit between Customer Outcomes, Value Propositions, and Capabilities fit

fit The extent to which there is alignment between the firm's operational capabilities, its value proposition, and the desires of its critical customers. At the heart of operations strategy is the notion of fit. Fit exists when operational capabilities support the value proposition and the outcomes desired by critical customers. If strategic planning processes are neglected, over time the dynamics of changing market trends, technologies, and competition can destroy the fit between customer-desired outcomes, value propositions, and capabilities. A company can find itself with capabilities and value propositions that no customers care about, either because it made improper investments, or because existing customers changed, or both. • For example, a firm may find itself using technologies that have become obsolete. Under such conditions, management has three options: (1) live with the mismatch (which means reduced profits and potential opportunities for the competition); • (2) change the critical customers to those who value the solutions provided by the firm; • or (3) change the operational capabilities. Each option requires top management involvement, resources, and time. Most often, changing operational capabilities is the hardest of the changes to make because the development of capabilities typically takes large investments made over long periods of time. Developing effective strategic planning processes that maintain fit is therefore imperative for a firm's survival over time

The third element of delivering value, as identified in Figure 2-2, is capabilities. Capabilities are unique and superior operational abilities that stem from the routines, skills, and processes that the firm develops and uses. As we stated earlier, it is difficult for an operations system to simultaneously deliver high levels of performance on many different dimensions. Thus, it is important to develop capabilities in the few areas that are of greatest strategic value for the firm. It is difficult to describe capabilities directly without describing them in terms of outcomes such as quality, flexibility, and so on. Usually, abilities to deliver superior performance come from investments and developmental efforts in one or more of the following areas: processes. Planning system. Technology people and culture. Supply chain relationships

• Processes—specialized routines, procedures, and performance measurement systems that guide operational activities. • Planning systems—access and development of sources of information, and use of proprietary decision support systems and processes. • Technology—proprietary usage of hardware or software that enables the firm to do things differently and/or better than competitors. • People and culture—skills, associated training programs, and cultural norms for the company that produce better motivation and performance. The impact of culture must be recognized at both a corporate and at a national level. • Supply chain relationships—unique and exclusive relationships with customers and suppliers that are unmatched by competitors

A well-designed value proposition has four characteristics:

1. offers a combination of product features that customers find attractive and are willing to pay for. 2. It differentiates the firm from its competition in a way that is difficult to imitate. 3. It satisfies the financial and strategic objectives of the firm. 4. It can be reliably delivered given the operational capabilities of the firm and its supporting supply chain. The value proposition reflects the order winners, order qualifiers, and order losers for a critical customer segment. Thus, the combination of traits contained in the value proposition greatly influences the competitive priorities for all the related operations across the supply chain. In order for operations managers to reliably deliver a given value proposition, they must appropriately align these product outcomes into operational competitive priorities . They need to clearly specify what the operations management system must do better than its rivals, what it must do at least as well as its rivals, and what it must avoid doing (because it will jeopardize customer satisfaction and orders). Competitive priorities, along with associated performance measures and targeted objectives, provide a language for managers to communicate the value proposition in operational terms. Typically, competitive priorities address both product-related outcomes and process-related capabilities. Once these priorities are established, they form the basis for performance measurement.

triple bottom-line approach to performance measurement

An approach to corporate performance measurement that focuses on a company's total impact measured in terms of profit, people (social responsibility), and the planet (environmental responsibility). Also referred to the as the <b>TBL,</b> the <b>3BL,</b> or the <b>3Ps.</b> The increasing importance of sustainability has caused many companies to adopt a "triple bottom line" approach to performance measurement. Using this approach, managers prepare three different measures of profit and loss. • The first is the traditional measure of performance—monetary profit; • the second is an assessment of its "people account"—how socially responsible the firm has been throughout its operations; • the third is the company's "planet account"—how environmentally responsible the firm has been. Together, these three Ps (Profit-People-Planet) capture the total impacts of a firm's business.

message table 2.3, page 38

Operations strategy is ultimately defined by what is done over time, not by what is written down as plans. Managers have to assign resources to tasks, identify the relative priorities of competing orders, and monitor the progress of orders and work as they flow through the system. In addition, managers have to devise and implement strategic initiatives needed to make planned changes to supply chain operations a reality. • For example, an operations strategy might depend heavily on making changes such as installing new equipment or systems, implementing a training program, adopting a new management approach, acquiring or divesting facilities, or downsizing the workforce. Strategic initiatives typically address operations that are spread across internal functions as well as across organizations making up the supply chain. Initiatives need to be coordinated across internal supply management, logistics, marketing, sales, and engineering groups in order to ensure that consistent decisions are made. Similarly, including supply chain partners in strategic planning and execution creates opportunities to exploit the complementary skills and assets of the partnerships. However, this also increases the complexity of planning and reduces the amount of direct visibility and control that managers have over operational outcomes. Thus, decisions and strategic initiatives must be formed in ways that integrate the concerns of internal operational activities with the concerns of suppliers and customers, without creating too much dependence on external partners. Decisions must also address the physical, structural elements of operations as well as the intangible, infrastructural elements. Table 2-3 lists decision areas that define how an operations strategy is deployed. Taken together, these decisions define the operations management system of the firm, how it is structured, how it operates, and how it is evaluated. These decisions are discussed in more detail in various chapters throughout this book.

Product-Related Competitive Priorities

Product-related priorities address the customer's problem to be "solved" and are communicated in terms of the quality, timeliness, and cost of the product "solution. " As Table 2-2 shows, each of these three product-related competitive priorities involves various dimensions. There are many different aspects of quality that may be important to customers, for example. Each dimension potentially appeals to different types of customers; each also may require different capabilities of supply chain operations. Because it is difficult, if not impossible, to simultaneously deliver the highest levels of all of these product attributes, operations managers need to communicate which attributes are of highest priority and lowest priority, respectively, in accordance with the order winners and qualifiers of the targeted critical customers. These priorities form the basis on which performance measures can be formulated and implemented

sustainability and risk management

Sustainability and Risk Management In recent years, operations managers have begun to address sustainability and risk-related issues more explicitly as competitive priorities. sustainability sustainability,is the focus is on maintaining operations that are both profitable and nondamaging to society or the environment. risk management risk management is to build operations that anticipate and deal with problems resulting from natural events (e.g., earthquakes), social factors (e.g., strikes), economic issues (e.g., a bankruptcy of a critical supplier), or technological issues (e.g., finding a major flaw in software). In addition to these operational types of risks, safety and security are growing key concerns, especially as supply chain operations become more global and dispersed. A famous example is provided by Mattel in 2007. The company recalled over nine million toys because of concerns over lead in the paint that was introduced by the actions of a lower-tier supplier located in China. Firms that provide food and drugs are intensely concerned with contamination, either accidental or intentional. Governments, social groups, and consumers are placing increasing demands on companies to be more socially responsible. In response, operations managers must place priorities on preventing environmental or human damage as a result of operations. This means an increasing emphasis on reduction of biohazards, and on using materials and processes that use less energy, require less input, and generate less waste. Operations managers also want to ensure that workers are treated fairly and given a safe work environment. These priorities have serious implications for decisions affecting all aspects of operations, beginning with supplier selection and buying decisions, and ending with product disposal.

At the heart of operations strategy are choices made in three primary areas which are critical customers Value proposition Capabilities

The critical customer is the customer or customer segment receiving priority because it is critical to the firm's current or future success. The value proposition is all of the tangible and intangible "benefits" that customers can expect to obtain by using the products offered by the firm. Capabilities are operational activities that the firm can perform well; these define the types of problems and solutions that operations can address proficiently. Marketing managers often lead decision making regarding customers and products. However, decisions in all three areas listed above need to be jointly agreed upon by executives in marketing, operations, and financial functions of the firm, because the decisions are so interdependent. For example, the types of customers that are chosen determine the value propositions that are relevant, which in turn determine the types of capabilities that will be required. As Figure 2-2 indicates, the objective of operations strategy development is to maximize the overlap among choices in these areas. The internal consistency of these choices is what ultimately creates value for the firm and for the marketplace. To ensure that a high level of consistency is achieved, operations managers must develop a deep understanding of their critical customers . First, this means understanding what these customers value in products. Second, the critical features of the value proposition need to be communicated in terms that make sense to operations managers. Third, strategic initiatives must be launched. If the required operational capabilities do not exist, then they must be developed, or different customers and value propositions should be targeted.

core capabilities

The skills, processes, and systems that are unique to the firm and that enable it to deliver products that are both valued by the customer and difficult for competitors to imitate. Sometimes certain capabilities become so unique and valuable to a firm that they are considered to be "core," that is, central to the very existence of the firm. Core capabilities are the skills, processes, and systems that are unique to the firm and that enable it to deliver products that are both valued by the customer and difficult for competitors to imitate. These are strategically critical, and are often the source of a stream of new products and market opportunities. For example, over the years Honda has developed successful products in a wide range of very different markets—motorcycles, power generators, cars, marine engines, lawn mowers, snow blowers, and now jet airplanes. In each market, Honda moved from being an outsider to become one of the major players. Honda succeeded because its core capability is its ability to design and build high-efficiency, low-vibration motors and engines. Such engines are common to each of the markets that Honda has entered.

LEVELS OF STRATEGIC PLANNING see pg 27

Within most firms, planning processes take place at several different levels. Internally, there is a hierarchy of strategic plans consisting of (1) corporate planning, (2) strategic business unit (SBU) planning, and (3) functional planning. These three levels should be closely linked (as shown in Figure 2-1) so that they are mutually consistent and supportive. Strategic plans made at all levels need to take into account the business environment, including economic conditions, competitor actions, market opportunities, regulatory changes, and so on. A firm's culture also typically influences the objectives it sets and the decisions it makes in strategic planning. For example, one firm might be more aggressive or more risk averse than another firm. In this section, we examine the objectives and interactions of strategic planning at the three levels. The remainder of the chapter focuses on operations strategy, one of the areas of functional strategy development.

flexibility respond efficiently

flexibility An operation's ability to respond efficiently to changes in products, processes (including supply chain relationships), and competitive environments. Flexibility is generally defined as an operation's ability to respond efficiently to changes in products, processes (including supply chain relationships), and competitive environments. The words respond efficiently mean that an operation can cope with a wider range of changes faster or with less cost than competitors can. With decreasing product life cycles, rapidly changing technologies, and growing pressure to meet localized, specific customer needs, flexibility has become an important priority for many companies today. Firms that have flexible operations have many opportunities to create value for their customers in unique ways. The potential for niche marketing is increased when operations can produce in small lots and deliver unique specifications quickly and inexpensively. Firms can command premium prices when their operations can be tailored to meet specific needs or when they can accommodate last-minute changes in demand. There are many types of flexibility, including short-term, operational flexibilities such as labor flexibility, as well as longer-term, strategic flexibilities such as the ability to introduce new products quickly. Consequently, it is important for operations managers to clearly define and focus on the types of flexibility they want to develop.

Functional Strategic Planning functional strategy what critical questions must the functional strategy address?

functional strategy Determines how the function will support the overall business unit strategy Every SBU consists of functional groups such as internal operations, marketing, accounting, engineering, supply management, logistics, and finance (to name a few). Each function has to generate a strategic plan—one that is coordinated with and supportive of the SBU plan. To that extent, the functional strategy must address certain critical questions: What specifically do we have to do to support the corporate and SBU strategies? What are the critical resources that we have to manage carefully if we are to achieve the corporate/SBU objectives? What metrics should we have in place to ensure we are making progress on these plans? What capabilities found in our function should be considered or recognized by the two higher stages of strategy? How should we coordinate our activities with those of the other functional areas within the firm to reduce friction and to enhance the ability of the firm/SBU to attain its overall objectives? Of the three levels of strategic planning, the functional strategy is the most detailed, as well as the most constrained, as it must operate within a set of decisions made in the corporate and SBU strategic plans.

swot analysis see page 27, for model

swot analysis A strategic planning technique to help firms identify opportunities where they can develop a sustainable competitive advantage and areas where the firm is significantly at risk. A business unit's strategy and business model are both shaped by the corporate strategy, by the specific requirements of the SBU's products and markets, and by the SBU's operating capabilities. One technique that managers use to assess these attributes is SWOT analysis (short for Strengths-Weaknesses-Opportunities-Threats). A SWOT analysis helps managers match strategies with strengths and opportunities while also reducing risks associated with weaknesses and threats. SWOT can be used in various ways—to kick off strategic thinking or as a serious detailed strategic assessment/planning tool. Questions often considered in a typical SWOT analysis are summarized in Table 2-1 on the next page.