Operational Strategies

Quality targets

A quality product is one that meets customers’ needs fully. A business may set itself s number of quality targets.

• A specific percentage of faulty products.

• Implementing quality standards, usually within a specific timescale

Cost and volume targets

• Cost targets. A business may set itself a unit cost target, aim to produce products at or below a stated average or unit cost

• Volume targets. Plans to produce more than a certain amount of output

Innovation

Innovation is the creation of new ideas and the successful development of products from these ideas. Innovation can also relate to new ways of making products. A business may set itself a target of being innovative and of bringing a certain number of new products to the market each year. This is more likely to be an operational target for businesses operating in fashion and technological markets.

Efficiency

• An efficient business produces the maximum number of outputs with the minimum number of inputs
• Cost efficiency-produces products very cheaply
• Resource efficiency-business aim to produce very little waste as a consequence of the production process
• Time efficiency
• Environmental targets
• For industries in the polluting sector setting and meeting environmental targets is vital

Targets include:

• Reducing or eliminating the use of non sustainable resources

• Reducing carbon emissions

• Cutting back on waste produced

• Achieving targets for recycling

Internal and external influences on operational objectives

• Corporate objectives of the business. The corporate and operations objectives of the business should be consistent and should not conflict.
• Financial position of the business-a business may be unable to afford to invest in machinery to meet self imposed environmental targets if it has endured a poor trading period.
• Nature of the product

External influences

• Operational objectives of competitors-need to match the objectives of their rivals
• Legislation-imposed laws that impact the operational objectives that firms can set themselves. Subjected to safety laws designed to protect consumers
• Tastes and fashions- if a business expects regular changes in the tastes and fashions of its customers a time based target is most useful.

Economies and diseconomies of scale; as firms grow in size, they begin to benefit from economies of scale. This means that unit production costs fall and up to a point efficiency and profits improve. This allows a business to reduce the cost of producing a unit of output and gives them the chance to sell at lower prices while maintaining profit margins.

Internal economies of scale- Internal economies are the factors that reduce unit or average costs in an individual firm as it increases the scale of its operations. Examples include:

• Purchasing economies, which exist when a firm are able to buy components of materials more cheaply, taking advantage of bulk discounts.
• Production economies which arise from the use of mass production techniques to speed up production. Firms producing greater quantities can afford to buy large specialised technically advanced machinery to lower production costs.
• Financial economies offer firms to be able to borrow more easily and at more favourable  rates of interest as they have greater reserves
• Marketing economies which reduce unit costs as firm are able to advertise extensively

External economies of scale:

The advantages of scale that benefit a whole industry not just individual firms. So if an industry is concentrated in one geographical area the following benefits might be available to a firm:

• A network of supplies
• Skilled labour
• Training courses
• A suitable infrastructure

Large firms can also suffer from diseconomies of scale. Once they are past their minimum efficient scale, the cost per unit of production begins to increase. This may be due to:

• Overuse of existing machinery-increases maintenance costs and causes breakdowns
• Communication problems. As the business grows people may not know who to report to
• Marketing problems. Managers may not concentrate on the right products

Capital and labour intensity; capital intensive production occurs when the production of the goods or services relies more heavily on capital than on other factors.

Deciding on the right labour and capital depends on a number of factors:

• Size of the business, it may be that a larger firm is able to justify and afford using types of technology that a smaller business does not
• Type of produce, if a business produces large quantities of standard products it may be feasible to use a greater proportion of capital in the production process.
• Finance available to the business-capital intensive production systems can be expensive, not only does the business have to invest in the capital equipment but it may also face substantial expenditure in training its employees to use the equipment efficiently.

Advantages and disadvantages

• Labour intensive production can lead to increased costs of recruitment, selection and training. It is also possible that labour disputes can lead to serious disruption of production. On the plus side, labour intensive production may also allow the business to claim a USP.
• Capital intensive production may help businesses to reduce their unit costs of production and to produce standard goods that meet agreed specifications, including quality targets. Capital intensive businesses may also be able to be more flexible in terms of quantity of output. However the major drawback is cost.

Innovation can cause cash flow problems, but it may be able to subsidise new products from more established ones. Once products enter the growth and maturity stages of their lifecycle, it might be appropriate for the business to invest in innovation for the next generation of products. This may need to occur even earlier if the new products are likely to take time to develop. The purpose of innovation is to give the company a competitive edge. Bringing out new products before a competitor can allow the company to charge premium prices.

Benefits of innovation:

• Businesses can gain a significant competitive advantage
• Can gain a reputation for producing high quality and sophisticated products.
• Patents can be used to protect business ideas for a period of up to 20 years allowing inventors to generate substantial earnings from their research.

Disadvantages

• Research can be expensive and only large firms are able to engage in it
• The timescale can be lengthy meaning investors will have to wait a long time for return on their money
• Other companies may adopt ‘me too’ products that are similar to a new product without having to undertake the expensive research, this can lead to loss of profit and sales
• Requires continuous investment
• The innovative product may fail
• Other firms may copy an innovative products