© 2006 Prentice Hall, Inc.2 – 1 Operations Management Chapter 2 – Operations Strategy in a Global Environment Chapter 2 – Operations Strategy in a Global Environment © 2006 Prentice Hall, Inc. PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 6e Operations Management, 8e

© 2006 Prentice Hall, Inc.2 – 2 OUTLINE   STRATEGIC ANALYSIS Strategic Management : Creating Competitive advantage Analyzing The External Environment of The Firm Assessing The Internal Environment of The Firm Recognizing a Firm`s Intellectual Assets : Moving Beyond a Firm`s Tangible Resources

© 2006 Prentice Hall, Inc.2 – 3   STRATEGIC FORMULATION Business-Level Strategy : Creating and Sustaining Competitive Advantages Corporate-Level Strategy : Creating Value through Diversification International Strategy : Creating Value in Global Markets The Internet and E-Commerce : Creating Value through E-Business Strategies

© 2006 Prentice Hall, Inc.2 – 4 STRATEGIC FORMULATION Business-Level Strategy Type of competitive advantage and sustainability :

© 2006 Prentice Hall, Inc.2 – 5 Strategy Decomposition Value chain analysisValue chain analysis

© 2006 Prentice Hall, Inc.2 – 6 Overall Low-Cost Leadership strategy

© 2006 Prentice Hall, Inc.2 – 7 Differentiation strategy

© 2006 Prentice Hall, Inc.2 – 8 Focus strategy Based on the choice of a narrow competitive scope.

© 2006 Prentice Hall, Inc.2 – 9 Global Operations Strategy  Global Operations Strategy Options  International Strategy  Multidomestic Strategy  Global Strategy  Transnational Strategy

© 2006 Prentice Hall, Inc.2 – 10 Four International Operations Strategies Cost Reduction Considerations HighLow HighLow Local Responsiveness Considerations (Quick Response and/or Differentiation)  Standardized product  Economies of scale  Cross-cultural learning Examples Texas Instruments Caterpillar Otis Elevator Global StrategyTransnational Strategy  Move material, people, ideas across national boundaries  Economies of scale  Cross-cultural learning Examples Coca-Cola Nestlé International Strategy  Import/export or license existing product Examples U.S. Steel Harley Davidson Multidomestic Strategy  Use existing domestic model globally  Franchise, joint ventures, subsidiaries Examples HeinzThe Body Shop McDonald’sHard Rock Cafe

© 2006 Prentice Hall, Inc.2 – 11 Global Strategies  Boeing – sales and production are worldwide  Benetton – moves inventory to stores around the world faster than its competition by building flexibility into design, production, and distribution  Sony – purchases components from suppliers in Thailand, Malaysia, and around the world

© 2006 Prentice Hall, Inc.2 – 12 Global Strategies  Volvo – considered a Swedish company but it is controlled by an American company, Ford. The current Volvo S40 is built in Belgium and shares its platform with the Mazda 3 built in Japan and the Ford Focus built in Europe.  Haier – A Chinese company, produces compact refrigerators (it has one-third of the US market) and wine cabinets (it has half of the US market) in South Carolina

© 2006 Prentice Hall, Inc.2 – 13 Reasons to Globalize  Reduce costs (labor, taxes, tariffs, etc.)  Improve supply chain  Provide better goods and services  Understand markets  Learn to improve operations  Attract and retain global talent Tangible Reasons Intangible Reasons Figure 2.1

© 2006 Prentice Hall, Inc.2 – 14 Reduce Costs  Foreign locations with lower wage rates can lower direct and indirect costs  Maquiladoras  World Trade Organization (WTC)  North American Free Trade Agreement (NAFTA)  APEC, SEATO, MERCOSUR  European Union (EU)

© 2006 Prentice Hall, Inc.2 – 15 Improve the Supply Chain  Locating facilities closer to unique resources  Auto design to California  Athletic shoe production to China  Perfume manufacturing in France

© 2006 Prentice Hall, Inc.2 – 16 Provide Better Goods and Services  Objective and subjective characteristics of goods and services  On-time deliveries  Cultural variables  Improved customer service

© 2006 Prentice Hall, Inc.2 – 17 Understand Markets  Interacting with foreign customer and suppliers can lead to new opportunities  Cell phone design from Europe  Cell phone fads from Japan  Extend the product life cycle

© 2006 Prentice Hall, Inc.2 – 18 Learn to Improve Operations  Remain open to the free flow of ideas  General Motors partnered with a Japanese auto manufacturer to learn  Scandinavian design ideas have been used to improve equipment design and layout

© 2006 Prentice Hall, Inc.2 – 19 Attract and Retain Global Talent  Offer better employment opportunities  Better growth opportunities and insulation against unemployment  Relocate unneeded personnel to more prosperous locations  Incentives for people who like to travel

© 2006 Prentice Hall, Inc.2 – 20 Cultural and Ethical Issues  Cultures can be quite different  Attitudes can be quite different towards  Punctuality  Lunch breaks  Environment  Intellectual property  Thievery  Bribery  Child labor

© 2006 Prentice Hall, Inc.2 – 21 Mission  Mission - where are you going?  Organization’s purpose for being  Answers ‘What do we provide society?’  Provides boundaries and focus

© 2006 Prentice Hall, Inc.2 – 22 Merck The mission of Merck is to provide society with superior products and services - innovations and solutions that improve the quality of life and satisfy customer needs - to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return Figure 2.2

© 2006 Prentice Hall, Inc.2 – 23 Benefit to Society Mission Factors Affecting Mission Philosophy and Values Profitability and Growth Environment CustomersPublic Image

© 2006 Prentice Hall, Inc.2 – 24 Strategic Process MarketingOperations Finance/ Accounting Functional Area Missions Organization’s Mission

© 2006 Prentice Hall, Inc.2 – 25 Strategy  Action plan to achieve mission  Functional areas have strategies  Strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses

© 2006 Prentice Hall, Inc.2 – 26 Strategies for Competitive Advantage  Differentiation – better, or at least different  Cost leadership – cheaper  Quick response – more responsive

© 2006 Prentice Hall, Inc.2 – 27 Competing on Differentiation Uniqueness can go beyond both the physical characteristics and service attributes to encompass everything that impacts customer’s perception of value  Safeskin gloves – leading edge products  Walt Disney Magic Kingdom – experience differentiation  Hard Rock Cafe – theme experience

© 2006 Prentice Hall, Inc.2 – 28 Competing on Cost Provide the maximum value as perceived by customer. Does not imply low quality.  Southwest Airlines – secondary airports, no frills service, efficient utilization of equipment  Wal-Mart – small overheads, shrinkage, distribution costs  Franz Colruyt – no bags, low light, no music, doors on freezers

© 2006 Prentice Hall, Inc.2 – 29 Competing on Response  Flexibility is matching market changes in design innovation and volumes  Institutionalization at Hewlett-Packard  Reliability is meeting schedules  German machine industry  Timeliness is quickness in design, production, and delivery  Johnson Electric, Bennigan’s, Motorola

© 2006 Prentice Hall, Inc.2 – 30 OM’s Contribution to Strategy Product Quality Process Location Layout Human resource Supply-chain Inventory Scheduling Maintenance FLEXIBILITY Sony’s constant innovation of new products………………………………....Design HP’s ability to follow the printer market………………………………Volume Southwest Airlines No-frills service……..…..LOW COST DELIVERY Pizza Hut’s five-minute guarantee at lunchtime…………………..…..……..Speed Federal Express’s “absolutely, positively on time”………………………..….Dependability QUALITY Motorola’s automotive products ignition systems…………………………......Conformance Motorola’s pagers………………………..….Performance IBM’s after-sale service on mainframe computers……....AFTER-SALE SERVICE Fidelity Security’s broad line of mutual funds………….BROAD PRODUCT LINE Figure 2.4 OperationsSpecificCompetitive DecisionsExamplesStrategy UsedAdvantage Response (Faster) Cost leadership (Cheaper) Differentiation (Better)

© 2006 Prentice Hall, Inc.2 – 31 Process Design LowModerateHigh Volume HighModerateLow Variety of Products Process-focused JOB SHOPS (Print shop, emergency room, machine shop, fine dining Repetitive (modular) focus ASSEMBLY LINE (Cars, appliances, TVs, fast-food restaurants) Product focused CONTINUOUS (steel, beer, paper, bread, institutional kitchen) Mass Customization Customization at high Volume (Dell Computer’s PC)

© 2006 Prentice Hall, Inc.2 – 32 Managing Global Service Operations  Capacity planning  Location planning  Facilities design and layout  Scheduling Probably requires a different perspective on:

© 2006 Prentice Hall, Inc.2 – 33 Characteristics of High ROI Firms  High quality product  High capacity utilization  High operating effectiveness  Low investment intensity  Low direct cost per unit From the PIMS program of the Strategic Planning Institute

© 2006 Prentice Hall, Inc.2 – 34 Strategic Options to Gain a Competitive Advantage 28% - Operations Management 18% - Marketing/distribution 17% - Momentum/name recognition 16% - Quality/service 14% - Good management 4% - Financial resources 4% - Financial resources 3% - Other 3% - Other

© 2006 Prentice Hall, Inc.2 – 35 Elements of Operations Management Strategy  Low-cost product  Product-line breadth  Technical superiority  Product characteristics/differentiation  Continuing product innovation  Low-price/high-value offerings  Efficient, flexible operations adaptable to consumers  Engineering research development  Location  Scheduling

© 2006 Prentice Hall, Inc.2 – 36 Preconditions  Strengths and weaknesses of competitors and possible new entrants into the market  Current and prospective environmental, technological, legal, and economic issues  The product life cycle  Resources available within the firm and within the OM function  Integration of OM strategy with company’s strategy and with other functional areas One must understand:

© 2006 Prentice Hall, Inc.2 – 37 Dynamics of Strategic Change  Changes within the organization  Personnel  Finance  Technology  Product life  Changes in the environment

© 2006 Prentice Hall, Inc.2 – 38 Product Life Cycle Best period to increase market share R&D engineering is critical Practical to change price or quality image Strengthen niche Poor time to change image, price, or quality Competitive costs become critical Defend market position Cost control critical IntroductionGrowthMaturityDecline Company Strategy/Issues Internet Flat-screen monitors Sales DVD CD-ROM Drive-through restaurants Fax machines 3 1/2” Floppy disks Color printers Figure 2.5

© 2006 Prentice Hall, Inc.2 – 39 Product Life Cycle Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality IntroductionGrowthMaturityDecline OM Strategy/Issues Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focus Enhance distribution Standardization Less rapid product changes – more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity Figure 2.5

© 2006 Prentice Hall, Inc.2 – 40 Strategy Development and Implementation  Identify critical success factors  Build and staff the organization  Integrate OM with other activities The operations manager’s job is to implement an OM strategy, provide competitive advantage, and increase productivity

© 2006 Prentice Hall, Inc.2 – 41 Strategy Development Process Determine Corporate Mission State the reason for the firm’s existence and identify the value it wishes to create. Form a Strategy Build a competitive advantage, such as low price, design, or volume flexibility, quality, quick delivery, dependability, after- sale service, broad product lines. Environmental Analysis Identify the strengths, weaknesses, opportunities, and threats. Understand the environment, customers, industry, and competitors. Figure 2.6

© 2006 Prentice Hall, Inc.2 – 42 Strategy Analysis SWOT Analysis Internal Strengths Internal Weaknesses External Opportunities External Threats Mission

© 2006 Prentice Hall, Inc.2 – 43 BALANCE SCORECARD

© 2006 Prentice Hall, Inc.2 – 44 BALANCE SCORECARD

© 2006 Prentice Hall, Inc.2 – 45 Competitive product space : representation of the firm’s product portfolio as measured along four dimensions or product attributes- product cost, response time, variety and quality.Competitive product space : representation of the firm’s product portfolio as measured along four dimensions or product attributes- product cost, response time, variety and quality.product cost, response time, variety and quality.product cost, response time, variety and quality. Strategic positioning : defines those positions that the firm wants to occupy in its competitiveness product space.Strategic positioning : defines those positions that the firm wants to occupy in its competitiveness product space. Operational effectiveness : developing processes and operating policies that support the strategic position better than processes and policies of competitors do. Operational effectiveness : developing processes and operating policies that support the strategic position better than processes and policies of competitors do. Strategic Positioning and Operational Effectiveness

© 2006 Prentice Hall, Inc.2 – 46 Product cost is the total cost that a customer incurs in order to own and experience the product. Product cost is the total cost that a customer incurs in order to own and experience the product. Product delivery-response time is the total time that a customer must wait before receiving a product or for which he or she has expressed a need to the provider. Product delivery-response time is the total time that a customer must wait before receiving a product or for which he or she has expressed a need to the provider. Product variety is the range of choices offered to the customer to meet his or her needs. Product variety is the range of choices offered to the customer to meet his or her needs. Product quality is the degree of excellence; how well the product performs. Product quality is the degree of excellence; how well the product performs.

© 2006 Prentice Hall, Inc.2 – 47 Cost Efficiency HighLow Low High B A Variety

© 2006 Prentice Hall, Inc.2 – 48 Corporate Strategy Enable everyday low prices and above average profitability by procuring, distributing, and selling products, when and where needed, at lower costs than any competitor Operations Structure Cross docking Proprietary electronic information system (Retail Link) Fast transportation system Focused locations Communication between retail stores Operations Strategy Short cycle times Low inventory levels Case of Wall-Mart strategy and its operations structure.

© 2006 Prentice Hall, Inc.2 – 49  What distinguish an effective business process? – equate effective and efficient process?  A process is efficient if it operates low cost. A process is effective if it supports the execution of the company’s strategy.  Strategic fit means consistency between the competitive advantage that a firm seeks and the process architecture and managerial policies that it uses to achieve that advantage. (an approach through market and process driven strategies, focused operations, and product-process matrix) product-process matrix product-process matrix Strategic Fit

© 2006 Prentice Hall, Inc.2 – 50 Line Flows (auto assembly) ContinuousFlow (oil refinery) Batch (heavy equipment, auto repair) Job Shop (commercial printer, architecture firm) High standardization Commodity products High volume FewmajorproductsManyproducts Low standardization One of a kind Low volume High ProductVariety Low ProcessFlexibility High Jumbled flow Process segments Loosely linked Disconnected line flow/ jumbled flow but a dominant flow exist Connected line flow (assembly line) Continuous, automated, rigid line flow Process segments tightly linked Opportunit y costs Out-of-pocketcosts