All the elements of operations strategy are important and need to be woven together to form a coordinated strategy. If the positioning of the system is wrong, the operations strategy will be ineffective. It should be an integral part of the overall corporate strategy and should include both the system type and the to-stock versus to-order decision.
One of the most common mistakes in positioning strategy is to attempt the production of products with fundamentally different requirements within the same basic production system. The result is that the match between market requirements and the production system is out of sync for some of the products. As a result, costs may be out of line, quality may not receive the necessary emphasis, or a result costs may be out of line, quality may be out of line, quality may not receive the necessary emphasis or delivery times may not meet requirements. Another common mistake is the failure to recognize the dynamics of the process life cycle, which necessitates the basic redesign of the production system as the product goes through its life cycle.
Making Capacity/Location Decisions Strategic:
G. Heileman Brewing Company, the nation’s fourth largest brewer, is making a strong move to penetrate the South, where its sales are only two percent of the regional total. By acquiring a modern plant in Georgia as a part of its battle for control of the Pabst Brewing Company, Heileman was establishing a beachhead. When you buy a battleship, you start a war, explained Russell Cleary, Heileman’s chairman and CEO. It could have built new capacity, but it is paying only about $ 17.50 per barrel for the existing brewing capacity, compared to the $50 per barrel that new capacity would cost. Furthermore, by brewing the beer in Georgia instead of brewing it at other plants in Maryland and Indiana and shipping it at high cost to the South, Heileman will be able to cut prices, if necessary to increase market share.
Videotape prices in the United States and elsewhere began to decline rapidly in 1982 when Fuji Photo Film, Hitachi Maxwell, and TDK collectively increased capacity by over 90 percent. This massive capacity increase was installed just as industry wide annual growth rates in sales declined to a relatively modest 40 percent. While consumers reaped the benefit of very low tape prices, the supply demand imbalance created havoc in the industry, and it was expected that the overcapacity would not be absorbed for at least two years.
Dow Chemical Company, headed for over capacity in basic chemicals, is shifting its product strategy towards higher margin, specialty chemical products. While over capacity in its basic chemical operations is not the only reason for the shift its existence in polyethylene capacity for example promised low margins in the future. Dow’s announcement that it would polyethylene capacity expansion projects in progress in South Korea, Saudi Arabia and Yugoslavia, and that it would add specialty chemical had great significance for the industry.
In March 1983, Domtar Incorporated, Canada’s largest maker of the fine papers announced that it would double the capacity of its paper mill in Windsor, Quebec. The announcement was quite factual, but it indicated that the mill to be enlarged was operating at a loss. In addition, the announcement stated that the mill benefits, however, from a good wood supply and is near the US border, for increased access tot hat market. It provides the best location for significant increases in productive capacity. To whom was the announcement really directed? How did the announcement to increase capacity fit with the company’s strategy?
The preceding news items dealing with capacity and location all suggest the importance of capacity / location decisions. In fact, these kinds of decisions are the most significant ones made in terms of the amount of capital involved and the amount of care with which they should be made from a strategic point of view. The risks are great because future demand is uncertain at best. But in making such decisions, forecasting competitors’ behavior is even more important than predicting demand. For example, if too many competitors add capacity, all firms in the industry are likely to suffer. Once installed, new capacity remains and over capacity can be a problem for the company and the industry far into the future.
The issue of capacity expansion immediately raises the companion issues of where to expand in order to improve the firm’s competitive position, how to counter competitors’ moves and how to tie capacity into the distribution network effectively.