How can an operations strategy be used to understand and exploit a particular product offering?

How can an operations strategy be used to understand and exploit a particular product offering?

 

The operations strategy determines how and where a product or service is to be manufactured, the level of vertical integration in the production process, the deployment of physical resources, and relationships with suppliers.  Each of these details can be exploited in terms of strategic implementation, allowing for competitive advantage.

 

8-2.      How are corporate scenarios used in the development of an effective strategy?

 

Corporate scenarios are pro forma balance sheets and income statements that forecast the effect each alternative strategy and its various programs will likely have on division and corporate return on investment. The results of a detailed scenario construction should be anticipated net profits, cash flow, and net working capital for each version.

 

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

 

8-3.      Are functional strategies interdependent, or can they be formulated independently of other functions? (LO 1)

 

Functional strategy is the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity.  It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage.  Each company or business unit has its own set of functional departments, each with its own functional strategy.  Because the orientation of each functional strategy is dictated by its parent unit’s business strategy, functional strategies must interrelate if they are to be successful.  For example, a company’s competitive strategy of differentiation through high quality means that each functional strategy must support high quality.  Distribution (part of marketing strategy) will probably be through quality distributors and retailers that emphasize customer service and support.  Operations will probably emphasize highly skilled employees and flexible manufacturing to adjust production to customer requests.  Even though both of these functional strategies can be formulated independently, they will need to mesh with each other if the competitive strategy is to be properly supported.  Although this has traditionally been a job of the general manager in charge of the parent SBU, it is increasingly being managed by cross-functional teams composed of managers from each of the functional areas.

 

8-4.      Do you believe that penetration pricing or skim pricing will be better at raising a company’s or a business unit’s operating profit in the long run? (LO 1)

 

When pricing a new product, a company or business unit can follow a marketing strategy of skim pricing or penetration pricing.  For new product pioneers, skim pricing offers the opportunity to skim the cream from the top of the demand curve while the product is novel and competitors are few.  Penetration pricing offers the pioneer the opportunity to utilize the experience curve to gain market share and dominate the industry.  Skim pricing is purely a short term phenomenon and is used to gain high profits quickly in order to pay for expensive R&D and marketing costs before new entrants engage in price competition.  Therefore, it cannot be used to raise long term operating profits unless the firm follows a differentiation strategy of continually entering markets early through exceptional R&D and exiting before the heavy-hitting late movers like IBM or Procter & Gamble force margins down.

 

8-5.      How does mass customization support a business unit’s competitive strategy? (LO 1)

 

Mass customization is an operations functional strategy.  According to the text, mass customization requires flexibility and quick responsiveness.  Appropriate for an ever-changing environment, mass customization requires that people, processes, units, and technology reconfigure themselves to give customers exactly what they want, when they want it.  The result is low cost, high quality, customized goods and services.  Mass customization is one way to support a differentiation strategy in a hypercompetitive market in which customers are demanding a highly differentiated product at a reasonable price.  The customer is primarily interested in purchasing a product designed to its own specifications and delivered where and when it needs them.  Even though price may be secondary to specific product characteristics, it cannot be significantly higher than the price for a mass produced good.

 

8-6.      When should a corporation or business unit consider outsourcing a function or an activity? (LO 2)

 

Outsourcing is purchasing from someone else a product or service that had been previously provided internally.  As such, it is an example of reverse vertical growth/integration.  According to the text, the key to outsourcing is to purchase from outside only those activities that are not key to the company’s distinctive competencies.  Oth