COMPETITIVENESS,

STRATEGY, AND
PRODUCTIVITY
 LEARNING OBJECTIVES

After this lecture, students will be ( ) able to

1. List several ways that business organizations compete.
2. Discuss and compare organization strategy and operations strategy
and explain why it is important to link the two.
3. Define the term productivity and explain why it is important to
organizations and to countries.
4. Describe several factors that affect productivity.

2
 OVERVIEW

Three separate, but related concepts that are vitally important

to business organizations:

Competitiveness
Strategy
Productivity

3
 COMPETITIVENESS

Competitiveness:
How effectively an organization meets the needs of customers
relative to others that offer similar goods or services

Organizations compete over:

Price (Cost): WAL-MART
Quality: BMW
Response-time: UPS
Variety (Flexibility): DELL

4
 DEVELOPING AN
OPERATIONS STRATEGY
Identify the competitive priorities required to support
the business strategy:
Common priorities include:
Cost: low production costs enables the company to price its
product below competitors
Quality: higher performance or a more consistent product
can support a price premium
Time: faster delivery or consistent on-time delivery can
support a price premium
Flexibility: highly customized products or volume flexibility
can support a price premium
 COMPETITIVE
PRIORITIES:
Custom Foot Shoe Store:
customers feet are scanned electronically to capture
measurements
custom shoes are mailed to the customers home in weeks
prices are comparable to off-the-shelf shoes
National Bicycle Industrial Company
offers 11,231,862 variations
delivers within two weeks at costs only 10% above standard
models
Hewlett-Packard
produces electronic testing equipment in five days
Dell
ships custom-built computers in two days
 OPERATIONS ROLE IN
CORPORATE STRATEGY

Operations provide support for a

differentiated strategy
Operations serves as a firms distinctive
competence in executing similar
strategies better than competitors
 OPERATIONS INFLUENCE ON
COMPETITIVENESS
Product and service design
Cost
Location
Quality
Quick response Competitiveness
Flexibility
Inventory management
Supply chain management
Service
Managers and workers
8
 WHY SOME ORGANIZATIONS
FAIL
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.
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 needs.
9
 EXERCISE
Name 10 ways that banks compete for customers.

Hint: consider operations influence on competitiveness

Product and service design
Cost
Location
Quality
Quick response
Flexibility
Inventory management
Supply chain management
Service
Managers and workers
 MISSION AND GOALS

Mission
The reason for an organizations existence
Mission statement
States the purpose of the organization
The mission statement should answer the question of What business
are we in?
The mission statement serves as the basis for organizational goals

Goals
Provide detail and the scope of the mission
Goals can be viewed as organizational destinations
Goals serve as the basis for organizational strategies

11
COMPARISON OF
ORGANIZATIONAL GOALS
 EXAMPLE MISSION
STATEMENTS
FedEx Mission Statement
http://about.van.fedex.com/mission-strategy-values
FedEx Corporation will produce superior financial returns for its
shareowners by providing high value-added logistics, transportation
and related business services through focused operating companies.
Customer requirements will be met in the highest quality manner
appropriate to each market segment served. FedEx will strive to
develop mutually rewarding relationships with its employees, partners
and suppliers. Safety will be the first consideration in all operations.
Corporate activities will be conducted to the highest ethical and
professional standards.

13
 STRATEGY

Strategy
A plan for achieving organizational goals
Serves as a roadmap for reaching the organizational destinations

Organizations have
Organizational strategies
Overall strategies that relate to the entire organization
Support the achievement of organizational goals and mission
Functional level strategies
Strategies that relate to each of the functional areas and that
support achievement of the organizational strategy

14
 TACTICS AND OPERATIONS

Tactics
The methods and actions taken to accomplish strategies
The how to part of the process

Operations
The actual doing part of the process

15
 ORGANIZATIONAL STRATEGY
Low Price
Outsource operations to countries with low labor cost
Use capital-intensive methods to achieve high output volume and low unit cost
Specialization
Focus on narrow product lines or limited services to achieve higher quality
Responsiveness (time-based strategies)
Strategies that focus on the reduction of time needed to accomplish tasks
Differentiation: Variety
Focus on customization
Differentiation: Newness
Focus on innovation to create new products or services
Differentiation: Service
Focus on various aspects of service (e.g., helpful, reliable, etc)
Differentiation: Quality
focus on quality in all phases of an organization in order to achieve higher quality than
competitors

16
 EXAMPLES OF STRATEGIES

Organizational Examples of Companies or

Strategy Operations Strategy Services
Low Price Low Cost Wal-Mart
Southwest Airlines
Responsiveness Short processing times McDonalds restaurants
On-time delivery FedEx
Differentiation: High performance design and/or BMW
High Quality high quality processing
Consistent Quality Coca-Cola
Differentiation: Innovation 3M
Newness Apple
Differentiation: Flexibility Burger King (Have it your way)
Variety Volume McDonalds (Buses Welcome)
Differentiation: Superior customer service Disneyland
Service IBM
Differentiation: Convenience Supermarkets
Location Banks, ATMs
17
 3M
Founded in 1902, 3M started out in the mining business as the Minnesota Mining
and Manufacturing Company.
3M launched the 15 percent program in 1948.
a program at 3M that allows employees to use a portion of their paid time to chase rainbows
and hatch their own ideas.
Thirty Percent Rule, 30% of each divisions revenues must come from products
introduced in the last four years.
Over a 20-year period, 3Ms gross margin averaged 51% and the companys
return on assets averaged 29%.
Mission
3M is a science and technology company that creates. For decades, 3M scientists and
engineers have developed products that solve problems. 3M is also a company that cares
improving lives each day. The mission of 3Mgives: To Improve Every Life through Innovative
Giving in Education, Community and the Environment mirroring our corporate vision:
3M Technology Advancing Every Company
3M Products Enhancing Every Home
3M Innovation Improving Every Life
 3M Electronic Monitoring

3M High Visibility Signals 19

3M Purification[citation needed]

ACCR[citation needed]

Aearo[citation needed]

Avagard Hygiene Range[citation needed]

Bair Hugger- patient warming system

Bondo- automotive body filler

Buf Puf[citation needed]

Cantata 700

Cavilon[citation needed]

Cubitron II[36]

Chrome & Metal Polish[citation needed]

Clarity

Coban[citation needed]

Command Adhesive[citation needed]

Comply Steam Indicators[citation needed]

Crimplok[citation needed]

DI-NOC[37]

Dobie[citation needed]

Durapore[citation needed]

Dynatel[citation needed]

FastBond Adhesives[citation needed]

Fibrlok[citation needed]

Filtrete[citation needed]

Fluorinert[citation needed]

Gold Privacy Filter

Hockey-Fusion Grip Stick Tape[citation needed]

 EXERCISE
Name three companies, and describe their core organizational
strategies in terms of the following options:
Low Price
Specialization
Responsiveness
Differentiation: Quality
Differentiation: Newness
Differentiation: Variety
Differentiation: Service

Go to industry and find the mission statements of the three

companies. Are their strategies aligned with their mission
statements?
 HIERARCHICAL PLANNING
AND DECISION MAKING
Mission

Goals

Organizational Strategies

Functional Goals
Finance Marketing Operations
Strategies Strategies Strategies

Tactics Tactics Tactics

Operating Operating Operating

procedures procedures procedures
21
FUNCTIONAL STRATEGIES

EVERY BUSINESS UNIT DEVELOPS FUNCTIONAL STRATEGIES FOR EACH

MAJOR DEPARTMENT

MARKETING STRATEGY

FINANCIAL STRATEGY

RESEARCH & DEVELOPMENT STRATEGY

OPERATIONS STRATEGY

PURCHASING STRATEGY

LOGISTICS STRATEGY

HUMAN RESOURCES STRATEGY

INFORMATION TECHNOLOGY STRATEGY

BASIC MARKET-PRODUCT STRATEGIES
THE CUSTOMER-PRODUCT DECISION

WHO IS OUR PRIMARY CUSTOMER?

WHAT KIND OF PRODUCT DO WE INTEND TO OFFER?

CUSTOMERS
EXISTING NEW
EXISTING - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

MARKET MARKET
PENETRATION DEVELOPMENT

PRODUCTS OR ---------------------------------------------

SERVICES
PRODUCT DIVERSIFICATION DEVELOPMENT INNOVATION

NEW - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
MARKETING STRATEGIES:
THE CUSTOMER-PRODUCT DECISION
MARKET PENETRATION STRATEGY
(Stay in current markets with existing products)
INCREASE RATE OF PURCHASE/CONSUMPTION
ATTRACT RIVALS CUSTOMERS
BUY OUT RIVALS
CONVERT NON-USERS INTO CURRENT USERS

MARKET DEVELOPMENT STRATEGY

(Find new markets for current products)
ENTER NEW GEOGRAPHICAL MARKETS
FIND NEW USES FOR EXISTING PRODUCTS
FIND NEW TARGET MARKETS

PRODUCT DEVELOPMENT STRATEGY

(Develop new products for existing markets)
IMPROVE FEATURES
IMPROVE QUALITY/RELIABILITY/DURABILITY
ENHANCE AESTHETICS/STYLING
ADD MODELS

DIVERSIFICATION STRATEGY
(Develop new products for new markets)
THE 4 PS OF MARKETING
MARKETING MIX ISSUES
Product Strategy
Specifying the exact product or service to be offered
New or existing product? for new or existing customers?
Promotion Strategy
How the product or service is to be communicated to customers
Push - spend $$$ on promotions and discounts to push products
Pull - spend $ to build brand awareness so consumers will ask for it by
name
Channel or Place Strategy
Selecting the method for distributing the product or service
Distribute through dealer networks or through mass merchandisers?
Sell directly to consumers through own stores or through internet?
Price Strategy
Establishing a price for the product or service
Skim pricing (high) when you are a pioneer
Penetration pricing (low) builds market shares
Dynamic pricing (prices vary frequently) based on demand/availability
FINANCIAL MANAGEMENT STRATEGIES
CAPITAL ACQUISITIONS
Debt Leverage, Stock Sales, & Gains from Operations
Equity financing is preferred for related diversification
Debt financing is preferred for unrelated diversification
Leveraged buyouts (LBOs) make the acquired firm pay off the
debt

CAN WE GROW BY RELYING ON ONLY INTERNAL CASH FLOWS?

DO STOCK SALES DILUTE OWNERSHIP CONTROL?
DOES A LARGE DEBT RATIO CRIPPLE FUTURE GROWTH?
DOES STRONG LEVERAGE BOOST EARNINGS PER SHARE?
DOES HIGH DEBT DETER TAKEOVER ATTEMPTS?
DO MOST LBOs UNDERPERFORM 3-4 YEARS AFTER THE BUYOUT?

RESOURCE ALLOCATIONS
Dividends, Stock Price, & Reinvestment
Reinvest earnings in fast-growing companies
Keeping the stockholders contented with consistent dividends
Use of stock splits ( or reverses) to maintain high stock prices
Tracking stock keeps interest in company, but doesnt allow
takeover
RESEARCH & DEVELOPMENT STRATEGIES

LEVEL OF INNOVATION
Pioneer (Leader) v. Copy Cat (Follower)
Technological leadership fits well with differentiation
A follower strategy makes sense with cost-leader
strategies
Are we better at finding applications and customer
adaptations than actually inventing something really
new?
Different types of R & D (basic, product, process)
Where is the firms historic expertise / advantage?
How competent are the R & D Personnel?
ACQUISITION OF TECHNOLOGY
Internally developed v. acquired from outside
Technology Scouts
Strategic Technology Alliances
Acquire minority stake in promising high-tech ventures
 OPERATIONS STRATEGY

The organizational 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.
In order for operations strategy to be truly effective, it is important to
link it to organization strategy

28
 OPERATIONS STRATEGIES

MANUFACTURING LOCATION
Internal Production v. Outsourcing

Domestic Plants v. International Locations

SYSTEM LAYOUT
Product v. Process Layouts
Job Shops v. Mass Production
Job shop/small batch production fits well with a
differentiation strategy
Continuous production / dedicated transfer lines helps
achieve cost leadership
Use of robots and CAD/CAM v. Labor intense manufacturing
Modular Manufacturing and just-in-time delivery of sub-
assemblies
Continuous improvement systems lower costs and increase
quality
DECISION AREAS OF STRATEGIC
OPERATIONS MANAGEMENT
PURCHASING STRATEGIES

SOURCING COMPONENTS AND SUPPLIES

WHERE CAN THE HIGHEST QUALITY COMPONENTS BE FOUND?

Outsourcing (our firm buys everything)

Buying on the Open Market (Spot) (prices fluctuate)
Long-Term Contracts with Multiple Suppliers (low bid)
Sole Sourcing (only one supplier) improves quality
Parallel Sourcing (two suppliers) provides protection

Backward Integration (our firm has an ownership

stake in the suppliers we use)
Quasi-integration (minority ownership position in a
supplier)
Tapered (produce some of what we need, but not all)
Full (produce all of our own needs)

Use of Component Inventories v. Just-in-time supply

delivery
 LOGISTICS STRATEGIES
DO WE HAVE GOODS THAT MUST BE TRANSPORTED OR DELIVERED?

TYPE OF MATERIALS TRANSPORTED (Bulky or Compact?)

Raw Materials, Supplies, & Components
Finished Goods

BEST MODE OF TRANSPORTATION

AIR
RAIL
TRUCK
BARGE

DO WE WANT DEPENDABILITY, LOW COST, OR HIGH QUALITY SERVICE?

OUTSOURCE TRANSPORTATION OR DO IT YOURSELF?

CONTRACT WITH OTHERS
Use Multiple Shippers v. Just One (UPS)?
Consider batch deliveries v. Just-in-time arrangements?
OWNERSHIP IN DISTRIBUTION CHAIN
Quasi
Tapered
Full
HUMAN RESOURCES STRATEGIES

TALENT ACQUISITION
Recruit from Outside v. Internal Development
Require experienced, highly-skilled workers v. we will train
you
Offer top dollar wages & benefits v. mentoring and a career

WORK ARRANGEMENTS
Individual Jobs v. Team Positions
Narrowly-defined jobs v. Positions with discretion and
autonomy
On-premises Work v. Telecommuting Options

MOTIVATION & APPRAISAL

Extrinsic v. Intrinsic Reward Systems
Assessment for development v. assessment for rewards
Incentives for ideas & originality v. incentives for conformity?
INFORMATION SYSTEMS STRATEGIES

WORKER PRODUCTIVITY & CONNECTIVITY

Employees can be networked together across the globe
Instant translation software for global firms
Follow the Sun Managementpass projects on to the
next team

SALES & INVENTORY MANAGEMENT

Internet sales and development of customer databases
Instant sales reports allow immediate inventory reorders

SHIPPING & TRACKING GOODS

FEDEX PowerShip softwarestores addresses, prints
labels, etc.
Tracking the progress of package shipmentFEDEX & UPS
WHICH FUNCTIONS CAN WE OUTSOURCE?

GLOBAL OUTSOURCING INCREASES EFFICIENCY & QUALITY

Averages 9% reduction in costs and 15% increase in capacity and quality
Up to 70% of Boeing planes are outsourced..built in just 4 mos v. 1 year

AMA SURVEY -- 94% OUTSOURCE AT LEAST ONE ACTIVITY

78% General & Administrative activities
77% Human Resources
66% Transportation & Distribution
63% Information Systems
56% Manufacturing
51% Marketing
18% Finance & Accounting

25% were disappointed in their outsourcing results

51% brought the outsourced activity back in-house

MOST LIKELY ACTIVITIES TO OUTSOURCE

Customer Service
Bookkeeping/Financial/Clerical
Sales/Telemarketing
Software Programming
Mailroom
OUTSOURCING DISADVANTAGES
CUSTOMER COMPLAINTS & UNEXPECTED DELAYS
LOCKED INTO LONG-TERM CONTRACTS THAT ARENT COMPETITIVE
THE FIRM DOESNT LEARN NEW SKILLS & DEVELOP CORE COMPETENCIES

A SURVEY OF 129 OUTSOURCING FIRMS

Half of the projects undertaken failed to achieve the anticipated savings
Software produced in India had 10% more bugs than comparable US projects

SEVEN MAJOR OUTSOURCING ERRORS

Outsourcing activities that shouldnt be outsourced
Failed to keep core activities in-house

Selecting the wrong vendor

Picked a vendor that wasnt trustworthy, or who lacks state-of-the art processes

Writing a poor contract

Balance of power favors the vendorlocked in over a long period of time

Overlooking personnel issuesmy area of expertise was outsourced!

Losing Control over the Outsourced Activity Were at their mercy!
Overlooking the hidden costs of outsourcing Transaction fees?
Failing to plan an exit strategy How can we reverse out of this deal?
SUCCESSFUL OUTSOURCING

KEY TO SUCCESS:
ONLY OUTSOURCE ACTIVITIES THAT ARE NOT RELATED TO THE FIRMS DISTINCTIVE
COMPETENCIES

TOTAL VALUE-ADDED to Firms

PRODUCTS & SERVICES
LOW HIGH HIGH ---------------------------------------------

TAPERED FULL VERTICAL

INTEGRATION INTEGRATION
ACTIVITYS Produce Some Produce All

POTENTIAL FOR Internally Internally

COMPETITIVE ---------------------------------------------

ADVANTAGE OUTSOURCE OUTSOURCE

COMPLETELY COMPLETELY
Buy on Open Market Use Long-Term Contracts
LOW - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
STRATEGIES TO AVOID

DUMB STRATEGIES

FOLLOW THE LEADER

We can do that toobut maybe its not worth copying
HIT ANOTHER HOME RUN
A pioneer company looking to get lucky again
ARMS RACE
Battles which increase costs and decrease revenues
DO EVERYTHING
Offering something for everyonetrying to please everyone
LOSING HAND
Pouring $$ down the knotholeinvestment because of prior commitments

NONE OF THESE STRATEGIES WILL CREATE A SUSTAINABLE

COMPETITIVE ADVANTAGE FOR THE FIRM
 WAL-MART DELIVERY SERVICE
SAYS TO AMAZON: 'BRING IT'
wsj.com 10/19/2012
In its latest bid to take on Amazon.com this holiday season, Wal-Mart is
promising same-day delivery in some cities for orders placed online. Called
Wal-Mart To Go, the service costs $10 regardless of the size of the order.
The products will be shipped from the company's stores, not from a warehouse
or distribution center. Wal-Mart is betting that its network of thousands of
stores, combined with an improved online presence can help it compete
head to head with Amazon, which has increasingly stressed fast, free or low-
cost deliveries.
UPS will pick up the goods and deliver them to customers
Nearly half of Wal-Mart's online sales now come from purchases customers
make online and pick up at a store, "We have a unique advantage because
we have the national footprint of stores combined with our online site that
enable programs like site to store, pay with cash or pick up today,"

39
 HIERARCHICAL PLANNING
AND DECISION MAKING
Mission

Goals

Organizational Strategies
Wal-Mart To Go
Functional Goals
Finance Marketing Operations
Strategies Strategies Strategies

Tactics Tactics Tactics

Operating Operating Operating

procedures procedures procedures
40
 OPERATIONS STRATEGY
AT WAL-MART

Cross dockingis a logistics procedure where products from a supplier or manufacturing plant are
distributed directly to a customer or retail chain with marginal to no handling or storage time.
 STRATEGY FORMULATION

Three common approaches

Michael Porter's five forces model
Environmental scanning (SWOT)
Balanced Scorecard

42
Source:
PORTER'S FIVE FORCES MODEL
SUPPLIER POWER
http://www.quickmba.com/strategy/porter.shtml Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in industry

THREAT OF NEW ENTRANTS DEGREE OF RIVALRY THREAT OF SUBSTITUTES

Barriers to Entry Exit barriers Switching costs
Absolute cost advantages Industry concentration Buyer inclination to substitute
Proprietary learning curve Fixed costs/Value added Price-performance
Access to inputs Industry growth trade-off of substitutes
Government policy Intermittent overcapacity
Economies of scale Product differences
Capital requirements Switching costs
Brand identity Brand identity
Switching costs Diversity of rivals
Access to distribution Corporate stakes
BUYER POWER
Bargaining leverage
Buyer volume
Buyer information
Brand identity
Price sensitivity
Product differentiation
Substitutes available
Buyers' incentives
43
GENERIC STRATEGIES
AND INDUSTRY FORCES
Generic Strategies
Industry
Force Cost Leadership Differentiation Focus

Ability to cut price in Customer loyalty can Focusing develops core

Entry
retaliation deters discourage potential competencies that can
Barriers potential entrants. entrants. act as an entry barrier.
Large buyers have less power Large buyers have less power
Buyer Ability to offer lower price to
to negotiate because of to negotiate because of
Power powerful buyers.
few close alternatives. few alternatives.
Suppliers have power because
of low volumes, but a
Better able to pass on supplier
Supplier Better insulated from differentiation-focused
price increases to
Power powerful suppliers. firm is better able to
customers.
pass on supplier price
increases.
Customer's become attached
Specialized products & core
Threat of Can use low price to defend to differentiating
competency protect
Substitutes against substitutes. attributes, reducing
against substitutes.
threat of substitutes.
Rivals cannot meet
Better able to compete on Brand loyalty to keep
Rivalry price. customers from rivals.
differentiation-focused
customer needs.
 SWOT

Environmental scanning (SWOT)

Internal Factors
Strengths and Weaknesses
External Factors
Opportunities and Threats

45
 SWOT: KEY INTERNAL FACTORS
1. Human Resources
Skills of workforce, expertise, experience, loyalty to the organization
2. Facilities and equipment
Capacities, locations, age, maintenance costs
3. Financial resources
Cash flow, access to additional funding, debt, cost of capital
4. Customers
Loyalty, wants and needs
5. Products and services
Existing, potential for new ones
6. Technology
Existing, ability to integrate new and its impact on current and future operations
7. Suppliers
Relationships, dependency, quality, flexibility, service
8. Other
Labor relations, company image, distribution channels etc.

46
 SWOT: KEY EXTERNAL FACTORS
1. Economic conditions
Health and directions of the economy, inflation, deflation, interest rates, taxes, tariffs.
2. Political conditions
Attitude towards business, political stability, wars
3. Legal environment
Antitrust laws, regulations, trade restrictions, minimum wages laws, liability laws, labor
laws, patents
4. Technology
Innovations rate, future process technology, design technology
5. Competition
Number and strength of competitors, basis of competitions (price, quality etc.)
6. Markets
Size, location, brand loyalty, ease of entry, growth potential, long term stability,
demographics.

47
 BALANCED SCORECARD
The idea of Balanced Scorecard (BSC) is to move away from
a purely financial perspective of the organization and
integrate other perspectives such as customers, internal
business processes, and learning and growth. Lag
measur
Balanced Scorecard e
Financial
How should we appear to our Objective Measur Target
shareholders? e
Consumer Improve Survey Up 20%
How should we appear to our customers? consumer score
Internal Business Process satisfaction and
What business process must we excel
Deliver <4
loyalty by 20% y time days
at?
Learning & Growth
How will we sustain our ability to Leading
change/improve?
measur
e 48
BALANCED SCORECARD

49
 STEPS IN STRATEGY
FORMULATION
1. Link strategy directly to the organization's mission or vision statement.
2. Assess strengths, weaknesses, threats and opportunities, and identify
core competencies.
Core competencies: The special attributes or abilities that give an organization a
competitive edge
3. Identify order winners and order qualifiers.
Order winners: Characteristics of an organizations goods or services that cause
it to be perceived as better than the competition
Order qualifiers: Characteristics that customers perceive as minimum standards
of acceptability for a product or service to be considered as a potential for
purchase
4. Select one or two strategies (e.g., low cost, speed, customer service)
to focus on.

50
 PRODUCTIVITY

Productivity
A measure of the effective use of resources, usually expressed as the
ratio of output to input

Outputs
Productivity =
Inputs

Productivity measures are useful for

Tracking an operating units performance over time
Judging the performance of an entire industry or country

51
 wsj.com 1/12/2012
The Factory Floor Has
a Ceiling on Job
Creation

Factories have been

producing more with
fewer workers.

Output for each hour of

work, or productivity, is
up an extraordinary 40%
as factories have
adopted new
technologies and
production processes.
 WHY DOES PRODUCTIVITY
MATTERS?
Brynjolfsson, E., and Hitt, L. M. 1998. Beyond the productivity
paradox. Communications of the ACM 41(8) 4955.

Productivity growth determines our living standards and the

wealth of nations. This is because the amount a nation can
consume is ultimately closely tied to what it produces.

By the same token, the success of a business generally

depends on its ability to deliver more real value for
consumers without using more labor, capital, or other inputs.

53
 MEASURES OF PRODUCTIVITY
Outputs
Productivity =
Inputs
Partial Output Output Output Output
measures Labor Machine Capital Energy

Multifactor Output Output

measures Labor + Machine Labor + Capital + Energy

Total Goods or Services Produced

measure All inputs used to produce them

54
 EXAMPLES OF PARTIAL
PRODUCTIVITY MEASURES

Partial Productivity Examples

Measures
Labor Productivity Units of output per labor hour
Units of output per shift
Value-added per labor hour
Machine Productivity Units of output per machine hour
Capital Productivity Units of output per dollar input
Dollar value of output per dollar input
Energy Productivity Units of output per kilowatt-hour
Dollar value of output per kilowatt-hour

55
 EXERCISE
Units produced: 5,000 Hint:
Standard price: $30/unit The key of this calculation is to convert
all the elements to their dollar values.
Labor input: 500 hours
Cost of labor: $25/hour Whats the dollar value of the
Cost of materials: $5,000 output / labor / material / overhead?
Cost of overhead: 2x labor cost
Output
MultifactorProductivity =
Labor + Material + Overhead
5,000 units $30/unit
=
(500 hours $25/hour) + $5,000 + (2(500 hours $25/hour))
$150,000
=
$42,500 What is the implication of an
= 3.5294 unitless measure of productivity?
 PRODUCTIVITY GROWTH

Current productivity Pervious productivity

Productivity Growth =
Pervious productivity 100%

Example: Labor productivity on the ABC assembly line was

25 units per hour in 2009. In 2010, labor productivity was 23
units per hour. What was the productivity growth from 2009
to 2010?
23 25
Productivity Growth = 100% = 8%
25

57
 SERVICE SECTOR
PRODUCTIVITY
Service sector productivity is difficult to measure
and manage because
It involves intellectual activities
It has a high degree of variability

Measurement Difficulties
Retailors
Quality Versus Quantity
Nurses

58
 FACTORS AFFECTING
PRODUCTIVITY
Methods

Capital Quality

INCREASE:
Calculators,
Computers, Faxes, Technology Management
copiers, Internet search
engines, Voice mail, cell REDUCE:
phones, email inflexibility, high costs,
mismatched operations,
non-work activities

59
 PRODUCTIVITY & TECHNOLOGY
NPR 4/30/13 When
It Comes To Productivity, Technology Can Hurt And Help
With instant messages buzzing, emails pinging and texts ringing, how
can employers increase productivity in the workplace? Software
companies are tackling the problem, tracking employees' computer
time to find ways to improve their efficiency.
Desk workers, creative workers,
 PRODUCTIVITY PARADOX
Brynjolfsson, E., and Hitt, L. M. 1998. Beyond the productivity
paradox. Communications of the ACM 41(8) 4955.
IT investment does not appear to
have a strong impact on productivity.
Explanations for the Paradox
1. Mismeasurement of outputs and inputs,
ATMs reduce the number of checks banks
process so, by some measures, banking output
and productivity decrease.
The increases in convenience ATMs have created
go uncounted in conventional productivity metrics,
while their costs are counted.

2. Lags due to learning and adjustment

61
 IMPROVING PRODUCTIVITY

1. Develop productivity measures for all operations

2. Determine critical (bottleneck) operations
3. Develop methods/technologies for productivity
improvements
4. Establish reasonable goals
5. Make it clear that management supports and encourages
productivity improvement
6. Measure and publicize improvements
Dont confuse productivity with efficiency

62
 KEY POINTS
Competitive pressure often means that business organizations
must frequently assess their competitors' strengths and
weaknesses, as well as their own, to remain competitive.
Strategy formulation is critical because strategies provide
direction for the organization, so they can play a role in the
success or failure of a business organization.
Functional strategies and supply chain strategies need to be
aligned with the goals and strategies of the overall organization.
The three primary business strategies are low cost,
responsiveness, and differentiation.
Productivity is a key factor in the cost of goods and services.
Increases in productivity can become a competitive advantage.

63
 CONCLUSION

A company can outperform rivals only if it can establish a difference that it

can preserve.
The essence of strategy is choosing to perform activities differently than
rivals do.
Strategic positions can be based on customers needs, customers accessibility,
or the variety of a companys products or services.
Trade-offs are essential to strategy. They create the need for choice and
purposefully limit what a company offers.
Fit locks out imitators by creating a chain that is as strong as its strongest
link.
The competitive value of individual activities cannot be separated from the
whole.
Strategic positions should have a horizon of a decade or more, not of a single
planning cycle.
At general managements core is strategy: defining a companys position,
making trade-offs, and forging fit among activities.