1 Chapter 2 Operations Strategies in a Global Economy

2 OverviewOverview l Introduction l Today’s Global Business Conditions l Operations Strategy l Forming Operations Strategies l Wrap-Up: What World-Class Producers Do

3 IntroductionIntroduction l Operational effectiveness is the ability to perform similar operations activities better than competitors. l It is very difficult for a company to compete successfully in the long run based just on operational effectiveness. l A firm must also determine how operational effectiveness can be used to achieve a sustainable competitive advantage. l An effective competitive strategy is critical.

4 Factors Affecting Today’s Global Business Conditions l Reality of global competition l Quality, customer service, and cost challenges l Rapid expansion of advanced technologies l Continued growth of the service sector l Scarcity of operations resources l Social responsibility issues

5 Reality of Global Competition l Changing nature of world business l International companies l Strategic alliances and production sharing l Fluctuation of international financial conditions

6 Changing Nature of World Business l The US gross domestic product (GDP) is, at $10 trillion, the largest in the world. l Companies all over the globe are aggressively exporting their products/services to the US l Many US companies are targeting foreign markets to shore up profits. l The global economy that interconnects the economies of all nations has been termed the global village. l One of the most important new markets is China.

7 International Companies l International companies are those whose scope of operations spans the globe as they buy, produce, and sell. l International firms search out opportunities for profits relatively unencumbered by national boundaries. l Operations managers must coordinate geopraphically dispersed operations.

8 Strategic Alliances l Strategic alliances are joint ventures among international companies to exploit global business opportunities. l Alliances are often motivated by l Product or production technology l Market access l Production capability l Pooling of capital

9 Production Sharing l Production sharing means that a product might be designed and financed in one country, its materials produced in other countries, assembled in another country, and sold in yet other countries. l The country that is the highest-quality, lowest-cost producer for a particular activity would perform that portion of the production of the product.

10 Pros and Cons of Globalization l Pros (Pluses) l Productivity grows more quickly (living standards can go up faster) l Global competition and cheap imports keep a lid on prices (inflation less likely to derail economic growth) l Open economy spurs innovation (with fresh ideas from abroad) l Export jobs often pay more than other jobs l US has more access to foreign investment (keeps interest rates low)

11 Pros and Cons of Globalization l Cons (Minuses) l Millions of Americans have lost jobs due to imports or production shifts abroad l Most displaced workers find new jobs that pay less l Workers face pay-cuts demands from employers l Service and white-collar jobs are increasingly vulnerable l US employees lose their comparative advantage when companies build advanced factories abroad

12 International Financial Conditions l International financial conditions are complex due to: l inflation l fluctuating currency exchange rates l turbulent interest rates l volatility of international stock markets l huge national debts of some countries l enormous trade imbalances between countries

13 International Financial Conditions l Companies must be ready to move quickly to shift strategies as world financial conditions change. l Opportunities are usually available to reduce risk l Building smaller, more flexible factories l Using foreign suppliers for materials, parts, or products l Carefully planning and forecasting so that changing conditions can be anticipated

14 Quality, Service, and Cost Challenges l Quality l The goal of adequate quality must be replaced with the objective of perfect product and service quality. l The entire corporate culture must be redirected and committed to the ideal of perfect quality. l All employees must be empowered to act. l A commitment to continuous improvement has to be organization-wide.

15 Quality, Service, and Cost Challenges l Customer Service l Companies must quickly develop innovative products and respond quickly to customers’ needs. l Organizational structures must be made more horizontal to quickly accommodate change. l Multidisciplined teams must have decision-making authority, responding better to the marketplace. l Large, unwieldy companies are spinning off whole business units making them autonomous businesses that can compete with small, aggressive competitors.

16 Quality, Service, and Cost Challenges l Cost l There is continuing pressure to reduce direct costs (of producing and selling) and overhead costs. l It cost the US automakers $1,500 more per auto for labor in 1980 than it cost the Japanese auto- makers. By the 1990s the difference was almost zero. l Giant retailers (like Wal-Mart) squeezed weaker competitors out of the market, giving the retailers the leverage to force their suppliers to streamline operations and reduce costs/prices.

17 Quality, Service, and Cost Challenges l Cost l Cost-cutting measures being used include: l Moving production to low-labor-cost countries l Negotiating lower labor rates with unions and workers l Automating processes to reduce the amount of labor needed, particularly processes that are labor intensive.

18 Advanced Technologies l The use of automation is one of the most far-reaching developments to affect manufacturing and services in the past century. l The initial cost of these assets is high. l The benefits go far beyond a reduction in labor costs. l Increased product/service quality l Reduced scrap and material costs l Faster responses to customer needs l Faster introduction of new products and services

19 Advanced Technologies l US companies cannot use automated production technology as a long-term competitive advantage. l Automation systems are available to any company in the world today, although the price is prohibitive for some companies. l Not investing, or delaying investing in this technology could be disastrous for a company.

20 Continued Growth of Service Sector l A robust service sector helps support the manufac- turing sector. l There is much opportunity for quality improvement in US service firms. l Many operations managers are being employed in services. l Planning, analyzing, and controlling approaches from manufacturing are being adapted to service systems. l The US service sector, like the manufacturing sector, must streamline and improve operations if it is to survive.

21 Scarcity of Operations Resources l Raw materials like titanium, nickel, coal, natural gas, water, and petroleum products are periodically unavailable or in short supply. l A shortage of any necessary input to a conversion subsystem, including skilled personnel, can be a challenge for an operations manager. l An important issue in the formation of business strategy is how to allocate scarce resources among business opportunities.

22 Social-Responsibility Issues l Corporate attitudes are evolving from doing what companies have a legal right to do, to doing what is right. l Factors influencing this evolution include: l Consumer attitude -- Consumers are expressing their likes/dislikes by such means as stockholder meetings, liability suits, and buying preferences. l Regulation – The EPA, OSHA, Clean Air Act, and Family Leave Act place constraints on businesses. l Self-interests -- Companies realize that profits will be greater if they act responsibly.

23 Social-Responsibility Issues l Environmental Impact l Product-Safety Impact l Employee Impact

24 Social-Responsibility Issues l Environmental Impact Concerns about the global environment include: l Landfill waste reduction l Recycling l Energy conservation l Chemical spills l Acid rain l Radioactive waste disposal l … and more

25 Social-Responsibility Issues l Environmental Impact l There is a need for standardizing government regulations of the environment. l Otherwise, companies will gravitate to the less- regulated countries. l The International Organization for Standardization has developed a set of environmental guidelines called ISO

26 Social-Responsibility Issues l Product-Safety Impact Harm to people or animals that results from poor product design can: l Damage a company’s reputation l Require a large expense to remedy l Cause governments to impose more regulations

27 Social-Responsibility Issues l Employee Impact Employee benefits and policies include: l Safety and health programs l Fair hiring and promotion practices l Day-care l Family leave l Health care l Retirement benefits l Educational assistance l … and more

28 Social-Responsibility Issues l Employee Impact Employee benefits and policies impact long-term profitability due to their effect on: l Employee morale and productivity l Recruitment and retention of employees l Demand for a company’s products l Cost of defending against lawsuits and boycotts

29 Developing Operations Strategy Corporate Mission Business Strategy Product/Service Plans Competitive Priorities Operations Strategy Assessment of Global BusinessConditionsAssessment BusinessConditionsDistinctiveCompetenciesorWeaknessesDistinctiveCompetenciesorWeaknesses

30 Corporate Mission l A corporate mission is a set of long-range goals and including statements about: l the kind of business the company wants to be in l who its customers are l its basic beliefs about business l its goals of survival, growth, and profitability

31 Business Strategy l Business strategy is a long-range game plan of an organization and provides a road map of how to achieve the corporate mission. l Inputs to the business strategy are l Assessment of global business conditions - social, economic, political, technological, competitive l Distinctive competencies or weaknesses - workers, sales force, R&D, technology, management

32 Competitive Priorities l Low Production Costs l Definition Unit cost (labor, material, and overhead) of each product/service l Some Ways of Creating l Redesign of product/service l New technology l Increase in production rates l Reduction of scrap/waste l Reduction of inventory

33 Competitive Priorities l Delivery Performance l Definition a) Fast deliveryb) On-time delivery l Some Ways of Creating a) larger finished-goods inventory a) faster production rates a) quicker shipping methods b) more-realistic promises b) better control of production of orders b) better information systems

34 Competitive Priorities l High-Quality Products/Services l Definition Customers’ perception of degree of excellence exhibited by products/services l Some Ways of Creating Improve product/service’s l Appearance l Performance and function l Wear, endurance ability l After-sales service

35 Competitive Priorities l Customer Service and Flexibility l Definition Ability to quickly change production to other products/services. Customer responsiveness. l Some Ways of Creating l Change in type of processes used l Use of advanced technologies l Reduction in WIP through lean manufacturing l Increase in capacity

36 Operations Strategy l Operations strategy is a long-range game plan for the production of a company’s products/services, and provides a road map for the production function in helping to achieve the business strategy.

37 Positioning the Production System l Select the type of product design l Standard l Custom l Select the type of production processing system l Product focused l Process focused l Select the type of finished-goods inventory policy l Produce-to-stock l Produce-to-order

38 Product/Service Plans As a product is designed, all the detailed characteristics of the product are established. Each product characteristic directly affects how the product can be made. affects how the product can be made. How the product is made determines the design of the production system. the design of the production system.

39 Stages in a Product’s Life Cycle l Introduction- Sales begin, production and marketing are developing, profits are negative. l Growth - sales grow dramatically, marketing efforts intensify, capacity is expanded, profits begin. l Maturity - production focuses on high-volume, efficiency, low costs; marketing focuses on competitive sales promotion; profits are at peak. l Decline - declining sales and profit; product might be dropped or replaced.

40 Stages of a Product’s Life Cycle Introduction Growth Maturity Decline Introduction Growth Maturity Decline B&W TV Automobile Video Recorder CD Player Color Copier Cell Phone Internet Radio Internet Radio Fax Machine Dot-Matrix Printer Printer

41 Outsourcing Plans l Outsourcing refers to hiring out or subcontracting some of the work that a company needs to do. l This strategy is being used more and more as companies strive to operate more efficiently. l Outsourcing has many advantages and disadvantages. l Companies try to determine the best level of out- sourcing to achieve their operations & business goals. l More outsourcing requires a company to have less equipment, fewer employees, and a smaller facility.

42 Outsourcing Plans l A company might outsource any of the following manufacturing related functions: l Designing the product l Purchasing the basic raw materials l Processing the subcomponents, subassemblies, major assemblies, and finished product l Distributing the product

43 Outsourcing Plans l Many companies even outsource some service functions such as: l Payroll l Billing l Order processing l Developing/maintaining a website l Employee recruitment l Facility maintenance

44 Process and Technology Plans l An essential part of operations strategy is the determination of how products/services will be produced. l The range of technologies available to produce products/services is great and is continually changing.

45 Strategic Allocation of Resources l For most companies, the vast majority of the firm’s resources are used in production/operations. l Some or all of these resources are limited. l The resources must be allocated to products, services, projects, or profit opportunities in ways that maximize the achievement of the operations objectives.

46 Facility Plans l How to provide the long-range capacity to produce the firm’s products/services is a critical strategic decision. l The location of a new facility may need to be decided. l The internal arrangement (layout) of workers, equipment, and functional areas within a facility affects the ability to provide the desired volume, quality, and cost of products/services.

47 Characteristics of Services and Manufactured Products Services Products Services Products Output Intangible Tangible Output Inventoried YesNo Customer Contact Extensive Little Lead Time Short Long Intensity Labor Capital Quality Subjective Objective

48 Forming Operations Strategies l Support the product plans and competitive priorities defined in the business strategy. l Adjust to the evolving positioning strategies. l Link to the marketing strategies. l Look at alternative operations strategies.

49 Evolution of Positioning Strategies l The characteristics of production systems tend to evolve as products move through their product life cycles. l Operations strategies must include plan for modifying production systems to a changing set of competitive priorities as products mature. l The capital and production technology required to support these changes must be provided.

50 Evolution of Positioning Strategies VolumeVeryLowLowHighVeryHigh FocusProcessProcessProductProduct Fin.Gds.To-OrderTo-OrderTo-StockTo-Stock BatchSizeVerySmallSmallLargeVeryLarge ProductCustomSlightlyStandardStandardHighlyStandard LifeStageIntro.EarlyGrowthLateGrowthMaturity

51 Linking Operations and Marketing Strategies l Operations Strategy l Product-focused l Make-to-stock l Standardized products l High volume l Marketing Strategy l Low production cost l Fast delivery of products l Quality l Example: TV sets

52 Linking Operations and Marketing Strategies l Operations Strategy l Product-focused l Make-to-order l Standardized products l Low volume l Marketing Strategy l Low production cost l Keeping delivery promises l Quality l Example: School buses

53 Linking Operations and Marketing Strategies l Operations Strategy l Process-focused l Make-to-stock l Custom products l High volume l Marketing Strategy l Flexibility l Quality l Fast delivery of products l Example: Medical instruments

54 Linking Operations and Marketing Strategies l Operations Strategy l Process-focused l Make-to-order l Custom products l Low volume l Marketing Strategy l Keeping delivery promises l Quality l Flexibility l Example: Large supercomputers

55 No Single Best Strategy l Start-up and Small Manufacturers Usually prefer positioning strategies with: l Custom products l Process-focused production l Produce-to-order policies These systems are more flexible and require less capital.

56 No Single Best Strategy l Technology-Intensive Business l Production systems must be capable of producing new products and services in high volume soon after introduction l Such companies must have two key strengths: l Highly capable technical people l Sufficient capital

57 Wrap-Up: World-Class Practice l Think more globally in purchasing and selling l Quickly adopt and develop new technologies l Trim organizations to be lean and flexible l Are less resistant to strategic alliances/joint ventures l Consider relevant social issues when setting strategies