1.2 Strategic role of operations management

The operations manager is responsible for strategic decisions about how the operations system functions. A strategic decision is one that affects the business in the long term. For example, where the business chooses to make its products will affect the location of operations or decisions about where the business gets its inputs from. Will the business buy inputs and raw materials from a local supplier or look offshore and buy from another country? The strategic goals of operations are to improve productivity, efficiency and quality of outputs. Strategic operational decisions will also need to suit the overall strategic goals and vision in the business plan and fit the changing business environment (see Source 1.4).

<strong>Source 1.4</strong> Strategic decisions about how operations will be managed
Source 1.4 Strategic decisions about how operations will be managed
<strong>Source 1.4</strong> Strategic decisions about how operations will be managed
Source 1.4 Strategic decisions about how operations will be managed
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There are three general areas of long-term decision-making:

  • planning production and delivery
  • controls to manage quality
  • improving operations.

Therefore, all strategic decisions will focus on lowering costs by being efficient and producing a good or service that is different from and competitive against those of rivals in the market (see Source 1.5).

Source 1.5 Strategic decisions
Area of strategic decision Examples of decisions to make
Product What new products need to be developed?
What products are reaching the end of their life cycle and need to be deleted?
How will products be made different from those of competitors?
What services will be provided?
Process How much capital and how much labour?
What developments in technology will there be that could be used in operations?
Capacity How large does the factory need to be?
How much equipment will be needed?
How much will the business need to make and supply per hour or day?
Location Stay, move to a different location in Australia or overseas, or outsource?
Can the business provide its services using the internet?
Factory layoutHow will manufacturing be physically set out?
People How many employees will be needed in the future?
What experience, skills and qualifications will employees need?
Quality How will quality be measured?
How will quality be improved?

Activity 1.1 Comprehension

  1. Identify TWO alternative terms that can be used instead of ‘transformation’.
  2. Explain how a business can use operations to achieve a competitive advantage.

    Examine the advertisement for the operations manager below to answer questions 3 and 4.

    Operations manager

    Hunter Valley Coal Ltd is seeking a talented operations manager with a background in mineral processing facilities. Applicants will need effective communication, organisation and negotiation skills as well as the ability to take a hands-on, practical approach to work.

    Technical knowledge of operations and related equipment is essential. Key areas of responsibility include implementation of health, safety and environmental policies and ensuring production meets targets. The role will oversee the expansion and automation of key aspects of coal processing.

    Industry-leading remuneration and compensation for relocation will be provided.

    Applications are to be directly submitted to the CEO of Hunter Valley Coal, Newcastle, NSW.

  3. Identify skills that the operations manager will need for this position.
    Explain why these skills are needed.
  4. Describe an example of the strategic decision-making that the job requires.

Cost leadership

A cost leadership strategy is one in which a business aims to be the lowest-cost manufacturer within its industry. The products are basic with fewer features, perhaps lower quality and using low-cost packaging. Low costs can be achieved through economies of scale in production and distribution, access to cheaper raw materials or by using technology. The business will expect a small profit margin on each item it sells, balanced by a high volume of sales to generate revenue.

Other areas in operations where low costs may be achieved include:

  • outsourcing product servicing so that the business focuses on its core function rather than after-sales service and warranty administration
  • exclusive access to a large source of low-cost inputs
  • distributing the product using dealers who work with lower profit margins.

If the business is able to achieve cost leadership and sustain it over the long term, and is also able to sell its products at prices below those of its competitors, then it will be an above-average performer with healthy sales and profits. Australian businesses need to use a cost leadership approach to be competitive against cheaper imported products.

Business Bite

Foxconn is the world’s largest manufacturer of smartphones, tablets and gaming consoles. The company’s clients include Apple, BlackBerry, Hewlett-Packard and Sony. It has factories in low-cost manufacturing centres such as Mexico, Brazil and China. The largest is in Shenzhen with 3.6 square kilometres of factory complex employing more than 140 000 workers. One hour’s drive away, and much smaller than Foxconn, is TCL LCD Industrial Park, with 10 000 employees. It is possibly the biggest television manufacturer in the world, producing more than 18 million TVs a year for a range of well-known companies. This is at a rate of 160 TVs per hour. In 2018 TCL invested US$6.7 billion to increase production of 65, 70 and 75 inch 8K resolution and OLED screens. This increased its operations capacity by an additional 90 000 screens per month. These enormous economies of scale allow Foxconn and TCL to gain a cost advantage over their rivals.

Source 1.6 Workers at Foxconn’s largest factory in Shenzhen, China.

Challenges to business

The challenge for a business using the cost leadership strategy is to achieve long-term benefits. Operations managers need to be aware of the following issues when using this strategy:

  • Competitors can use the same strategy and may achieve even lower costs.
  • Small businesses are able to implement strategies to reduce costs much faster than larger firms.
  • The business’s product may be perceived by customers to be of poor quality compared to those of its competitors because competitors offer better technology, features and service.
  • Developments in technology may change consumer preferences. A business may have invested a considerable amount of finance into low-cost manufacturing of a particular product only to find that the wants of its customers have changed to a new technology item.
  • Consumer preferences may change and the market for a ‘low-cost, low-quality’ product may shrink. Consumers may even feel that these types of ‘throwaway’ products are not environmentally sustainable.
  • A competitor may use aggressive marketing with heavily discounted prices or loss leading prices. The business using a cost leadership strategy cannot then make a profit, even with its cost advantage.
  • A business can be ‘leapfrogged’ by another business that can afford a large financial investment in research and development.

A cost leadership strategy may not be sustainable in the long run unless the benefits can be maintained with effective marketing, finance and human resources strategies. Therefore, operations is interdependent with the other business functions.

Ethical spotlight 1.1

In an attempt to lower prices and still maintain their own profit margins, some businesses have placed excessive pressure on their suppliers to cut their prices to the retailer; for example, in the dairy industry. Is it ethical to reward consumers with lower prices when the businesses creating these products are facing an unsustainable future?

Good/service differentiation

A business may decide that a better strategy to achieve a sustainable advantage in a competitive market is to differentiate its products rather than aiming to be the lowest-cost supplier. Customers have ever-increasing expectations about quality, service and technology. Therefore, a product may achieve a greater market share because it is uniquely different from its competitors’ products.

Differentiation through operations may be achieved through:

  • better quality
  • faster delivery
  • custom-designed products
  • more features and applications
  • incorporation of new technology
  • more reliability
  • clever design.

Business Bite

Technological innovation has created opportunities for businesses specialising in information technology (IT). With the growing demand for secure data storage, cloud computing services have developed as an essential business service. In 2016, YourDC opened in northern Adelaide in a converted car parts factory. The centre is secure enough to hold highly sensitive information that meets defence standards as Australia’s first TIA-942 Rated 3 facility. The site has capacity to store 2400 petabytes – equivalent to the memory of 150 million smartphones. YourDC has expanded with a second data centre in Adelaide’s southern suburbs. The company now offers internet connectivity services with speeds to 1 Gbps (gigabit per second). A speed of only 100 Mbps (megabits per second) connection means several people can have multiple Netflix movies streaming at the same time and not notice the difference.

Differentiation strategies

Good examples of a differentiation strategy are the voice recognition software and ‘touchscreen’ technologies used in Apple products such as iPhones and iPads.

A differentiated product can command a higher price in the market because customers are attracted to the product and loyal to the brand. The higher price will cover expenses incurred from investment to research and develop new products. A sales team will promote the advantages of the product and its technological innovation.

The risks associated with this strategy are that competitors can imitate the market leader’s innovations and consumer preferences can still change.

Source 1.7 Uber has successfully achieved differentiation by utilising smartphone applications.