Competitiveness, Strategy, and Productivity Chapter 2 Competitiveness, Strategy, and Productivity

the bar is getting higher A Cold Hard Fact Better quality, higher productivity, lower costs, and the ability to respond quickly to customer needs are more important than ever and… the bar is getting higher 2-2

Competitiveness Companies must be competitive to sell their goods and services in the marketplace. Competitiveness is an important factor in determining whether a company prospers, barely gets by, or fails.

Business organizations compete through some combination of their marketing and operations functions. Marketing influences competitiveness in several ways, including identifying consumer wants and needs, pricing, and advertising and promotion.

Operations has a major influence on competitiveness through product and service design, cost, location, quality, response time, flexibility, inventory and supply chain management, and service. Many of these are interrelated.

Why Some Organizations Fail Organizations fail, or perform poorly, for a variety of reasons. Being aware of those reasons can help managers avoid making similar mistakes. Among the main reasons are the following: Neglecting operations strategy Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive threats Putting too much emphasis on short-term financial performance at the expense of research and development

Why Some Organizations Fail (cont’n) Placing too much emphasis on product and service design and not enough on process design and improvement. Neglecting investments in capital and human resources. Failing to establish good internal communications and cooperation among different functional areas. Failing to consider customer wants and needs.

Mission and Strategies An organization’s mission is the reason for existence. It is expressed in its mission statement. A mission statement serves as the basis for organizational goals, which provide more detail and describe the scope of the mission. Goals serves as a foundation for the development of organizational strategies. Organizational strategy is important because it guides the organization by providing direction for, and alignment of, the goals and strategies of the functional units.

Three Basic Business Strategies LOW COST RESPONSIVENESS DIFFERENTIATION

Strategies and Tactics Strategies provide focus for decision making. Organizations have organizational strategies and functional strategies. Tactics are the methods and actions used to accomplish strategies. They are more specific than strategies.

Walmart discovered that when it opened stores in Japan Walmart discovered that when it opened stores in Japan. Although Walmart thrived in many countries on its reputation for low- cost items, Japanese consumers associated low cost with low quality, causing Walmart to rethink its strategy in the Japanese market. Strategy formulation is almost always critical to the success of a strategy.

Many felt that Hewlett- Packard(HP) committed a strategic error when it acquired Compaq Computers at a cost of $19 billion. HP’s share of the computer market was less after the merger than the sum of the shares of the separate companies before the merger.

Long known for its highly durable leather goods in a market where women typically owned few handbags, Coach created a new market for itself by changing women’s view of handbags by promoting “different handbags for different occasions” such as party bags, totes, clutches, wristlets, overnight bags, purses, and day bags. And Coach introduced many fashion styles and colors.

To formulate an effective strategy, senior managers must take into account the core competencies of the organizations, and they must scan the environment. They must determine what competitors are doing, or planning to do, and take that into account. They must critically examine other factors that could have either positive or negative effects. This is sometimes referred to as the SWOT approach (strengths, weaknesses, opportunities, and threats).

In formulating a successful strategy, organizations must take into account both order qualifiers and order winners. Order qualifiers are those characteristics that potential customers perceive as minimum standards of acceptability for a product to be considered for purchase. However, that may not be sufficient to get a potential customer to purchase from the organization. Order winners are those characteristics of an organization’s goods or services that cause them to be perceived as better than the competition.

Operations Strategy The organization strategy provides the overall direction for the organization. It is broad in scope, covering the entire organization. Operations strategy is narrower in scope, dealing primarily with the operations aspect of the organization. Operations strategy relates to products, processes, methods, operating resources, quality, costs, lead times, and scheduling.

Strategic Operations Management Decision Areas

Productivity measures are useful for A measure of the effective use of resources, usually expressed as the ratio of output to input Productivity measures are useful for Tracking an operating unit’s performance over time Judging the performance of an entire industry or country 2-20

Why Productivity Matters High productivity is linked to higher standards of living As an economy replaces manufacturing jobs with lower productivity service jobs, it is more difficult to maintain high standards of living Higher productivity relative to the competition leads to competitive advantage in the marketplace Pricing and profit effects For an industry, high relative productivity makes it less likely it will be supplanted by foreign industry 21

Productivity Measures 22

Productivity Calculation Example Units produced: 5,000 Standard price: $35/unit Labor input: 500 hours Cost of labor of $25/hour Cost of materials: $5,000 Cost of overhead: 2x labor cost What is the multifactor productivity? 23

Solution 24

U.S. Multifactor Productivity (1976 – 2010) 2-25 Instructor Slides

Productivity Growth Example: Labor productivity on the ABC assembly line was 25 units per hour in 2006. In 2007, labor productivity was 23 units per hour. What was the productivity growth from 2006 to 2007? 26

Service Sector Productivity Service sector productivity is difficult to measure and manage because It involves intellectual activities It has a high degree of variability A useful measure related to productivity is process yield Where products are involved ratio of output of good product to the quantity of raw material input. Where services are involved, process yield measurement is often dependent on the particular process: ratio of cars rented to cars available for a given day ratio of student acceptances to the total number of students approved for admission. 2-27 Instructor Slides

Factors Affecting Productivity Methods Capital Quality Technology Management 2-28

Improving Productivity Develop productivity measures for all operations Determine critical (bottleneck) operations Develop methods for productivity improvements Establish reasonable goals Make it clear that management supports and encourages productivity improvement Measure and publicize improvements Don’t confuse productivity with efficiency 29

Competitiveness Competitiveness: How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services Organizations compete through some combination of their marketing and operations functions What do customers want? How can these customer needs best be satisfied?

Businesses Compete Using Operations Product and service design Cost Location Quality Responsiveness Flexibility Inventory management Supply chain management Service Managers and workers

Sample Strategies Organizational Strategy Operations Strategy Examples of Companies or Services Low Price Low Cost U.S. first-class postage Wal-Mart High Quality High performance design and/or high quality processing Consistent Quality Sony TV Lexus Coca-Cola; electric power Short Time Quick Response On-time delivery McDonald’s Restaurants Express mail FedEx; One-hour photo Newness Innovation 3M Variety Flexibility Volume Burger King (Have it your way”) McDonald’s (“Buses Welcome”) Service Superior customer service Disneyland IBM Location Convenience Supermarkets Mall Stores

Quality-Based Strategies Quality-based strategy Strategy that focuses on quality in all phases of an organization Pursuit of such a strategy is rooted in a number of factors: Trying to overcome a poor quality reputation Desire to maintain a quality image A desire to catch up with the competition A part of a cost reduction strategy Instructor Slides 2-33

Time-Based Strategies Strategies that focus on the reduction of time needed to accomplish tasks It is believed that by reducing time, costs are lower, quality is higher, productivity is higher, time-to-market is faster, and customer service is improved Instructor Slides 2-34

Time-Based Strategies Areas where organizations have achieved time reductions: Planning time Product/service design time Processing time Changeover time Delivery time Response time for complaints Instructor Slides 2-35

Agile Operations Agile operations A strategic approach for competitive advantage that emphasizes the use of flexibility to adapt and prosper in an environment of change Involves the blending of several core competencies: Cost Quality Reliability Flexibility 2-36 Instructor Slides