Mis 2

OPERATIONS MANAGEMENT
for MBAs Second Edition

Meredith and Shafer
Prepared by
Scott M. Shafer
Wake Forest University
John Wiley and Sons, Inc.

1
Chapter 2
Business Strategy and Global
Competitiveness
Chapter 2: Business Strategy and

Global Competivevess
Introduction

Manor Care
Operates Sleep Inns
Labor Shortage
Designed rooms to minimize housekeeping
staff needed
attached nightstands to walls

no doors on closets
rounded shower stalls
advanced security system
Manor Care Results

Rooms can be cleaned in 20 minutes versus
30 minute industry standard.

92-room hotel operated with equivalent of
11 full-time workers.

American Steel Industry

Foreign competition posed major threat to
industry in early 1980s.

In 1982, US producers needed 10.59 labor
hours to produce on metric ton compared
with 10.01 hours in Japan.
US closed plants, modernized others, and
reduced payrolls.
American Steel Industry continued

By middle of 1991, US steelmakers able to
produce a metric ton with 5.4 hours compared

to 5.6 hours for Japanese.
At the same time, quality also improved.
In early 80s, Ford rejected 8% of domestic
steel shipments and 20% were late.
By early 1990s, steel rejects reduced to 1%
and 99% of shipments were on time.
Technology Examples
Kansas City Power & Light using automatic
meter readers which broadcasts data on

electricity usage and eliminates $15/hour
human meter readers.
Coca-Cola is installing similar technology in
its vending machines.
This will allow Coke to better schedule
deliveries and evaluate ad campaigns.
Examples Illustrate
Shortage of employees often necessitates
need to improve productivity.

Increased competition (especially foreign
competition) another reason why companies
seek to improve their productivity.
Improving productivity is often dependent
on new technologies.
Top Management
Responsible for making and keeping
organization competitive.
Develops business strategy
provides direction and vision
guides short- and long-term decisions
must consider international competition
All functional areas and business processes
must support the business strategy.

10
Business Strategy
A set of objectives, plans, and policies for the
organization to successfully compete in its markets.
Long range (3 to 5 years)
It specifies what organizations competitive
advantage will be
Focuses on few key areas
The pattern of decisions made over time is in fact an
organizations business strategy.
11
Formulating the Business

Strategy

12
Strategy Formulation
13
Vision and Mission Statements

Vision statements used to express
organizations values and aspirations.

Mission statements express
organizations purpose or reason for

existence.
14
Core Competencies
Collective knowledge and skills an
organization has that distinguish it from the

competition.
Typically center on an organizations ability to
integrate a variety of specific technologies and
skills in the development of new products and
services.
Building blocks of core capabilities.
15
Core Competencies continued

Are basis on which new outputs are developed.
Better to think of organization in terms of its
portfolio of core competencies than as a

portfolio of products.
Identifying and developing core competencies
is one of top managements most important
roles.
16
Core Capabilities
Organization practices and business
processes

17
Examples of Core Competencies

Sony - miniaturization
3M- knowledge of substrates, coatings and
adhesives
Black and Decker - small electrical motors
and industrial design
Honda - engines and power trains

18
Core Competencies Used to Gain

Access to Variety of Markets
Cannon
core competencies in optics, imaging, and
electronic controls
Products include copiers, laser printers,
cameras, and image scanners.
Boeing
integrating large scale systems
commercial jetliners, space stations, missiles
19
Key Characteristics of Core

Competencies/Capabilities
Should be used to gain access to a variety of
markets
Should be strongly related to key benefits
provides by products or services
Should be difficult to imitate

20
Outsourcing
Subcontracting out production of parts or
performance of activities
Activities and parts fall on a continuum
ranging from strategically unimportant to
strategically important
Activities not strategically important are
candidates to be outsourced
21
Strategically Important Parts or

Activities
Strongly related to what customers perceive
to be key product characteristics.

Require highly specialized skill and
knowledge.
Require highly specialized physical assets
The organization has the technological lead
or is likely to obtain it.
22
Hollowed Out
The extent that most of a firms complex
parts and production are outsourced

Often when complex parts outsourced,
engineering talent follows
Supplier may become competitor

23
Creeping Breakeven
Phenomenon
Viscous cycle where products appear to
become more expensive to produce inhouse as others are outsourced.

Result from way overhead allocated
Logical conclusion is organization ends up
producing no outputs.

24
Business Strategy and the

Product Life Cycle

25
The Life-Cycle Curve

26
Product Life Cycle

Strategies often tied to product life cycle
Length of life cycles shrinking
Business strategy should match life cycles
stages

27
Categories of Business Strategies

28
First-to-Market Strategy
Products available before competition
Strong applied research capability needed
Can set high price to skim market or set
lower price to gain market share

29
Second-to-Market Strategy
Quick imitation of first-to-market
companies
Less emphasis on applied research and
more emphasis on development
Learn from first-to-markets mistakes

30
Cost Minimization or Late-toMarket Strategy

Wait until market becomes standardized and
large volumes demanded

Compete on basis of costs instead of
product features
Research efforts focus on process
development versus product development

31
Market Segmentation
Serving niche markets
Applied engineering skills and flexible
manufacturing processes needed

32
The Balanced Scorecard

Helps translate mission and strategy into
appropriate performance measures.

Traditionally organizations relied primarily on
financial measures.
No single set of measures can provide information
needed in all critical areas of the business.
Purpose of balanced scorecard the development of a
set of measures that provides a comprehensive view
of the organization.
33
Benefits of Using Balanced

Scorecard
Clarify and gain consensus of strategy
Mechanism for communicating strategy
Mechanism for aligning departmental and
personal goals to the strategy

Help ensure strategic objectives are linked to
annual budget
Timely feedback related to improving the
strategy
34
Performance Measured in Four

Areas
Financial Performance
Customer Performance
Internal Business Process Performance
Organizational Learning and Growth

35
Developing a Balanced
Scorecard
Top management translates mission and strategy
into specific customer and financial objectives.

Measures for internal business processes
developed on basis of customer and financial
objectives.
Investments in employee training and information
technology linked to customer, financial, and
internal business process objectives.
36
Focus
Goal of business strategy is to establish and
maintain a unique strength, or focus that

leads to a sustainable competitive
advantage.
Two successful competitive positions
lowest cost
outstanding strength
37
Common Areas of Focus

Innovation
Product/service
Customization
reliability
Delivery reliability
Response
After-sale service
Price
Product/service
flexibility
Volume flexibility
Performance
Quality

38
Order Qualifiers and Winners

Order qualifiers are
characteristics that are

the ante to enter the
market
Order winners are
characteristics that win
the customers
purchase
39
Loss of Focus
New outputs
New attributes
New tasks
Departmental
professionalism
Ignorance and
noncommunication
Life cycle changes
40
Product Life Cycle Stages and

Emphasis

41
Strategic Frameworks

42
The Sand Cone Model

43
Example Performance Frontier

44
New Technology Results in Shift

of Performance Frontier

45
Stages of Operational
Effectiveness
Internally Neutral
Externally Neutral
Internally Supportive
Externally Supportive

46
Global Competitiveness
Long-term viability of a firm
Short-term success in terms of market share
or profitability
Since 1970s, imports to the US have grown
faster than exports from the US
US is biggest debtor nation in world

47
The United States Merchandise

Trade

48
Exchange Rates
US competitiveness reflected in value of
dollar relative to other currencies

As US increases its imports relative to its
exports, a surplus of US dollars
accumulates abroad reducing the
desirability of holding US dollars
Price adjusted broad dollar index
49
Purchasing Power of the Dollar

50
Implications of Exchange Rate

A large value of the price adjusted broad
dollar index indicates a strong dollar making

it easier for Americans to afford imports.
A weaker value of the price adjusted broad
dollar index makes American products more
competitive in foreign markets.
Economic relationship can be mediated by
government actions.
51
International Markets and

Producers
Three Major Trading Regions
Europe
North America
Pacific Rim
Previously firms classified as domestic,
exporters, or international
Now have global firms, joint ventures, foreign
subsidiaries
52
Three Major Trading Regions

53
Reasons to Produce Offshore

Circumvent governmental regulations
Avoid effects of currency fluctuations
Avoid fees and quotas
Placate local customers

54
Supply Chain Management

Cost of labor decreasing
Cost of logistics becoming more significant
Total value chain of global production
Coordination
Information flows
Finding efficient suppliers
Identifying and evaluating transportation
options
55
New Technologies
ERP
EDI
Bar coding
Internet

56
Six Primary Characteristics of

Transformation Process
Efficiency
Effectiveness
Capacity
Quality
Response time
Flexibility
57
Productivity Definitions and

Measures
Normally defined as output per worker hour
This is a partial measure of productivity
Total Factor Productivity includes all
factors of production:
output
labor + capital + materials + energy
58
Improving Productivity Growth

Estimated that technology has been
responsible for at least half the productivity

gains in the U.S.
Mechanization
Automation

59
International Comparisons of
Productivity

60
International Comparisons of
Growth in Productivity

61
Why is Productivity Important?

For a society to increase its standard of
living it must increase its productivity

How has the standard of living changed
since 1970 in the US?

62
Living Standards in 1970 Compared to

1990 (Source: Reason, December 1995)
Average size of new home (square
feet)
New homes with central air
conditioning
People using computers
Households with color TV
Households with VCRs
Households with 2 or more vehicles
1970
1990
1,500
2.080
34%
76%
less than 100,000 75.9 million

33.9%
96.1%
67 million
29.3%
54%

63

1970
1990
13%
5.2%
Households owning microwave over
less than 1%
78.8%
Heart transplant procedures
less than 10
2,125 (1991)
Average work week
37.1 hours
34.5 hours
Average daily time working at home
3.9 hours
3.5 hours
Homes lacking a telephone

64

1970
Work time to buy gas for 100-mile trip
Annual vacation and paid holidays
Women in workforce
Recreational boats owned
Shipments of RVs
1990
49 minutes 31 minutes (1992)

15.5 days
22.5 days
31.5%
56.6%
8.8 million
16 million
30,300
226,500

65

1970
1990
Adult softball teams
29,000
188,000
Recreational golfers
11.2 million
27.8 million
Americans taking cruises
500,000
3,600,000
Americans finishing high school
51.9%
77.7%
Americans getting 4 year college degree
13.5%
24.4%

66

1970
1990
Employee benefits as share of payroll
29.3%
40.2% (1992)
Life expectancy at birth (years)
70.8
75.4
Index of pollution
100
34.1

67
Responsiveness
Customization, Response Time, and
Quality

68
Customization
Ability to offer a product or service exactly
suited to the customers desires or needs

Closer matches to customers needs
Ability of offer full product line with
minimal inventory
Faster design-to-market time to meet new
customer needs
69
Continuum of Customization

70
Mass Customization
Goal is to produce low cost, high quality
outputs in high variety

Mass Customization Strategies
Collaborative customizers
Adaptive customizers
Cosmetic customizers
Transparent customizers
71
Prerequisites and Advantages of

Rapid Response
Sharper focus on the
Improved focus
customer
Better management
Efficient processing
Higher quality
Overhead elimination
Reduced charges
Faster revenue
generation
Better communication
Improved morale

72
Cost Reductions with Decreases

in Response Time

73
Defining and Measuring Quality

Conformance to specifications
Performance
Quick response
Quick-change expertise
Features
Reliability
Durability
74
Defining and Measuring Quality

continued
Serviceability
Aesthetics
Perceived quality
Humanity
Value

75
Benefits of High Quality

More satisfied customers
Enhanced reputation
Increased profitability and higher market shares
Protection from competition
Minimizes safety risks and liability
Higher worker morale
Reduced production costs
76
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77

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OPERATIONS MANAGEMENT

for MBAs Second Edition

John Wiley and Sons, Inc.

Chapter 2: Business Strategy and

Chapter 2: Business Strategy and

attached nightstands to walls

Manor Care Results

30 minute industry standard.

Chapter 2: Business Strategy and

American Steel Industry

industry in early 1980s.

American Steel Industry continued

produce a metric ton with 5.4 hours compared

meter readers which broadcasts data on

need to improve productivity.

All functional areas and business processes

must support the business strategy.

Formulating the Business

Chapter 2: Business Strategy and

Vision and Mission Statements

organizations values and aspirations.

organizations purpose or reason for

organization has that distinguish it from the

Core Competencies continued

portfolio of core competencies than as a

Chapter 2: Business Strategy and

Examples of Core Competencies

Chapter 2: Business Strategy and

Core Competencies Used to Gain

Key Characteristics of Core

Chapter 2: Business Strategy and

Strategically Important Parts or

to be key product characteristics.

parts and production are outsourced

Chapter 2: Business Strategy and

become more expensive to produce inhouse as others are outsourced.

Logical conclusion is organization ends up

Chapter 2: Business Strategy and

Business Strategy and the

Chapter 2: Business Strategy and

The Life-Cycle Curve

Chapter 2: Business Strategy and

Product Life Cycle

Chapter 2: Business Strategy and

Categories of Business Strategies

Chapter 2: Business Strategy and

lower price to gain market share

Chapter 2: Business Strategy and

Chapter 2: Business Strategy and

Cost Minimization or Late-toMarket Strategy

large volumes demanded

Chapter 2: Business Strategy and

manufacturing processes needed

Chapter 2: Business Strategy and

The Balanced Scorecard

appropriate performance measures.

Benefits of Using Balanced

personal goals to the strategy

Performance Measured in Four

Chapter 2: Business Strategy and

into specific customer and financial objectives.

maintain a unique strength, or focus that

Common Areas of Focus